Volumes have surged in the U.S. collateralized loan obligation (CLO) primary market with $200 billion in gross supply for the first half of 2024.1 For comparison, 2022 and 2023 saw full-year primary market volumes of $152 billion and $145 billion, respectively.2 Despite rising primary volumes, spreads — commonly referred to as discount margin (DM) — on CLOs continued to tighten as the second quarter of 2024 came to a close.
Today’s Chart of the Week breaks down the supply of U.S. CLOs a bit further. Primary market supply of CLOs consists of new issuance, resets and refinances. Resets and refinances have negligible impact on the net supply of CLOs as they constitute a restructuring (reset) or repricing (refinancing) of an existing CLO. Approximately 50% of the gross supply of CLOs this year has been from reset and refinance activity, compared with 16% for 2023.3
The remaining $100 billion of CLO gross supply this year is from new issuance; however, the U.S. CLO market has grown in size by only $36 billion in 2024.4 Several factors have contributed to this difference. Approximately 40% of the CLO market exited the reinvestment period by the end of 2023, which has resulted in approximately $42 billion in amortization of existing CLO debt in 2024.5 Furthermore, $22 billion of CLO debt is estimated to have been called away from deals that were liquidated.6
Key Takeaway
CLO managers should continue to be incentivized by current AAA CLO spread levels to improve the funding costs and extend the reinvestment periods of their existing debt, which would keep call activity and reinvestment needs elevated for investors. Robust inflows into CLO exchange-traded funds (ETFs) this year from retail investors have created additional demand for CLOs as well. I believe our nimble, relative-value focused approach to fixed-income investing is crucial for navigating the current surge in primary market activity in the CLO market.
Sources:
1-6Bank of America Global Research; June 2024
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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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