CLO Market Performance Proves Doubters Wrong — Evening Brief – 10.03.24
Investors are incorporating CLOs into their portfolios even in the face of recent interest rate volatility. Where else can one obtain a 100-basis point spread on short-term triple-A securities? Triple-A CLO notes have narrowed approximately 50 basis points since the year’s onset, facilitating widespread repricings and generating a surge in issuance.
CLO yields have risen to 11.93% this year from 8.46% in 2021, while CLO equity is up 17.1% in 2024 from 14.8% in 2021, according to a report from Nuveen. The CLO market’s attraction is bolstered by continually low default rates, notwithstanding the difficult ‘higher-for-longer’ interest rate environment. Despite the prospect of decreasing interest rates, the asset class has been regarded as complementary to alternative lending methods.
Nonetheless, CLOs remain a niche market, and investors who are less acquainted with the product tend to disregard its profitability and stability during a sovereign debt crisis, a pandemic, a war, and collapses of U.S. regional banks. It may be time to examine CLOs more closely.
“CLOs are a very seasoned asset class, coming up on 30 years in existence and just over $1 trillion in size,” said Anders Persson, CIO of global fixed income at Nuveen. “We are finding investors are becoming more comfortable with the asset class.”
According to Persson, investors regard structured credit as a diversification tool and appreciate its liquidity compared to other alternative assets. In comparison to private equity, CLOs can deliver immediate cash flows and distributions while offering comparable returns.
The report revealed 470 U.S. CLOs (broadly syndicated, private credit, and middle market) were priced at a total of $207.4 billion, which is a significant increase from the $57 billion issuance in the first half of 2023. The volume of issuance through early September has already exceeded that of 2023.
CLO market growth has been fueled by numerous large firms that have introduced new offerings designed for the middle market. For example, last month, Comvest Credit Partners closed its inaugural CLO, the Comvest 2024-1 CLO, at $500 million. Also in September, hedge fund Chatham Asset Management announced the launch of its own CLO management business, CTM Asset Management. Meanwhile, Clearlake Capital Group acquired MV Credit, a pan-European private credit specialist with $5.1 billion in assets under management across CLOs and other strategies, from Natixis.
In January, global investment firm Carlyle announced the final close of its inaugural CLO captive equity fund, CLO Partners, raising over $600 million and exceeding its initial $500 million target. In July, Antares Capital closed its third broadly syndicated loan (BSL) CLO, the Orion CLO 2024-3, at $400 million. In October 2023, the Chicago-based alternative assets manager closed its debut BSL CLO, Orion CLO 2023-1, totaling $450 million.