By the Numbers
In CLOs, it pays for now to play in secondary
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The secondary market in CLOs now trades at wider spreads than the primary market for securities with similar risk, making the secondary a much better place for relative value. Liquid ‘AAA’ classes, for example, lately have offered spreads in secondary as much as 16 bp wider than similar securities at new issue. For investors that can aggregate positions over time, there is size and opportunity.
The secondary CLO market has seen heavy selling in recent weeks while the flow of new CLOs into the market has generally slowed. The median weekly volume of bid lists for ‘AAA’ CLOs, for example, ran at $219 million in 2021 but has jumped to $698 million this year (Exhibit 1). And ‘AAA’ bid list volume in the past four weeks has exceeded even this year’s elevated median volume.
Exhibit 1. US ‘AAA’ CLOs weekly bid list volume has jumped this year
Source: Amherst Pierpont Securities, Kopen Technologies
By contrast, the issuance of new CLOs had a slow start this year with uncertainties around the LIBOR-to-SOFR transition and steadily widening CLO debt spreads—often without similar widening in leveraged loans. The median weekly CLO new issuance volume year-to-date is $2.8 billion, and it takes CLO managers a longer time to get a deal closed in today’s market (Exhibit 2). It is also worth noting that a handful of deals closed recently used structures other than the traditional 5NC2, signaling the challenging economics of a traditional structure and the need for shorter structures and static structures to lower the cost of funds.
Exhibit 2. US CLO weekly new issuance volume recently has slumped
Source: Amherst Pierpont Securities, Bloomberg
Some recent flows highlight the gap between secondary and primary markets. CIFC Funding 2022-1A Class A appeared on a May 3 bid list offered at a discount margin of SOFR + 162 bp. CIFC is a relatively liquid platform with $25 billion in AUM, and it is a programmatic issuer with four deals closed year-to-date with an aggregate new issue volume of $1.9 billion. Amherst Pierpont analysis of past CIFC new issues indicates its debt usually trades 0.26 standard deviations tighter than its peers. Another CIFC LIBOR-indexed bond, CIFC Funding 2021-6A Class A, traded in secondary on May 6 with price talk of $98.5 to $98.8, implying a SOFR-based discount margin around 160 bp. But on May 9, Invesco 2022-2 Class A1 priced at a discount margin of SOFR + 144 bp. Invesco also is a relatively liquid platform with $6.2 billion in AUM, and this is the second deal priced with year-to-date new issue volume of $1 billion. Amherst Pierpont analysis of past Invesco new issues shows its debt prices on average 0.24 standard deviations tighter than peers—very close to CIFC. A high-level loan attributes comparison across the CIFC and Invesco deals along with APS CLO manager model outputs show comparable risk (Exhibit 3).
Exhibit 3. Comparable risk across CIFC and Invesco ‘AAA’
Source: Amherst Pierpont Securities, INTEX, KopenTechnologies
The heavy bid list volume in recent weeks has come with an increase in the share of bonds that do not trade and widening price talk in the secondary market. For example, the difference between the highest and the lowest cover for ‘AAA’ CLOs traded in a month was range-bound at 0.5 to 1.5 points last year, but the difference has increased to 5 to 6 points in the last two months (Exhibit 4). The wide secondary market is presenting opportunity for investors to find some good value. APS’s latest review of CLO managers performance can be found in the newly launched APS CLOutlook.
Exhibit 4. Price gaps and DNTs have jumped for ‘AAA’ CLOs in secondary
Note: DNT ratio is computed as the number of DNT bonds over number of posted securities in a month.
Source: Amherst Pierpont Securities, Kopen Technologies
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