Federal Reserve rate cuts this year remain uncertain, but leveraged borrowers have already received the equivalent of two 25 basis point cuts so far in 2025 as collateralized loan obligations (CLOs) and other lenders scramble for loans, and spreads continue to tighten. Meanwhile, investor demand for CLOs and other securitizations remains elevated.
"[Fed Chair Jerome]Powell may not cut rates, we'll cut coupons: 2025 repricings shaved off 52 bps of coupon savings in 2025, equivalent to 2 Fed rate cuts," noted Bank of America Securities in its July 25 CLO Weekly report. "Considering 25% of loans has been repriced this year, the entire loan index has thus saved coupon of 13bps YTD on average."
BofA noted that more than $126 billion of loans, or 9% of the loan market, has already been repriced month-to-date, and 25% of the loan market has been repriced year-to-date, with 55% of those repricings above par, including 25% above 100.25. About 50% of repriced loans this year and last had 50 bps of coupon savings, and 18% of deals have received savings of 75 bps this year, compared to 18% last year.
"We expect this repricing wave continues," the BofA analysts added.
Meanwhile, CLO spreads in the secondary market have continued to tighten, falling to 118 bps last week, according to BofA, which said they're more attractive compared to comparable rated corporate bonds, although less so relative to mortgage bonds.
"We think CLO AAA has a tightening bias as demand continues to be strong and arbitrage also remains challenging," BofA said.
Looking back, the bank noted that the loan primary market was muted in April and May because of tariff volatility, but it rebounded in June to $45 billion, and it was $40 billion through July 25. Issuance has been driven by refinancings.
Loans rated single B saw the most repricing by volume and share across ratings, BofA said, adding that 34%, or $132 billion, of B loans were repriced, providing a 56 bps reduction in spread.
Asset-backed securities (ABS) are also seeing significant demand from investors. BofA reported that last week saw the highest weekly volume, $15.6 billion, since September 2023, including 10 auto ABS deals, two equipment, and one franchise.
"The pipeline includes at least 4 deals, consisting of device payment plan ABS, personal loan ABS, music royalties ABS and prime auto loan ABS," BofA said.
