CLO sales in US hit annual record amid leveraged buyout loan boom

(Bloomberg) – Sales of secured loan bonds in the United States hit a new annual record on Friday, surpassing $ 131 billion, as investors clamor to buy securities with high ratings and protection against inflation.

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New issuance topped the record high of $ 130.4 billion in 2018 and may not slow down in the coming months. Some banks predict that CLO’s sales could reach $ 160 billion, and there are some 200 short-term lines of credit to fund future transactions.

CLOs, the biggest buyers of leveraged loans, are benefiting from a large buyout debt offering, including Medline Industries Inc., which on Thursday sold one of the biggest LBOs on record. And the potential benefit of forming CLO, also known as arbitration, is still relatively high. This makes it easier for companies to sell the riskier parts of CLOs, known as equity.

“We are in a golden age for CLO stocks, and demand for paper remains strong,” said Thomas Majewski, managing partner at Eagle Point Credit Management, which buys CLO stocks.

CLOs have come under scrutiny from regulators and rating agencies, who have expressed concern about the deterioration in the quality of loans bundled into securities. At the start of the pandemic, investors feared loans could be downgraded en masse or even defaulted, resulting in losses for at least some CLO investors.

But the defaults ended up being minimal, in part because of the Federal Reserve and government bailout programs. Only a few portions of poorly ranked U.S. CLOs are expected to default in the wake of the 2020 economic downturn, analysts at S&P Global Ratings said in a study released last month. As the economy recovers, many investors have become more optimistic about the outlook for stocks.

Securities are also attractive because of their variable rates, which can translate into higher returns as inflation rises. CLOs typically pay higher yields for securities with higher ratings than their corporate bond counterparts.

“CLOs are always accepted,” said Shiloh Bates, Managing Director of Flat Rock Global, a CLO equity investor. “They’ve gone from a financial backwater to a more traditional asset class.”

Fast pace

CLO sales crossed the $ 100 billion mark at the fastest pace on record this year, according to data compiled by Bloomberg. Additionally, August saw an official monthly record for CLO deals, with $ 19.6 billion sold, according to data compiled by Bloomberg News and Bank of America Corp. strategists. The global CLO market has crossed the $ 1 trillion mark in assets.

And there may be as many as 200 active CLO lines of credit now, known as warehouse lines, a 30% increase from July, estimates Western Asset Management Co. These numbers are at or above 2018 levels. when, according to data compiled by Bloomberg, the CLO market posted a record annual issuance of $ 130.4 billion.

“The number of warehouses means banks feel comfortable being able to sell transactions in this favorable environment,” said Ryan Kohan, head of leveraged loans at Western Asset.

New CLOs from asset managers PGIM, Churchill Asset Management, PennantPark Investment Advisers, Irradiant Partners, First Eagle Alternative Credit and Partners Group were assessed on Friday to put the tally above.

While the annual record refers to new issuance of CLOs backed by largely syndicated loans and mid-market loans, the market has also hit a record for so-called refinancings and more deal resets. old. When CLO spreads tighten, managers are able to obtain better terms on refinancing or resetting open trades once they are out of their no-call periods. Even transactions that started in 2020 that had one year without appeal are refinanced or reset.

There have been $ 88.2 billion in refinances this year through September 30 and $ 101.6 billion in so-called resets, which often change other parameters of the transaction, such as deadlines, in addition revaluation at a lower rate.

(Updates with Friday’s offers in the twelfth paragraph)

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