European collateralized loan obligations underperformed other types of securitization in the region in the first half of 2014, but Barclays expects CLOs to catch up on some of the ground they lost.
In a report published Tuesday, analysts at the bank predict that spreads on European CLOs issued in the second half will be 15-40 basis points narrower. It expects that spreads on triple-A rated tranches could tighten by 15 basis points, while spreads on double-A rated bonds could tighten by 20 basis points, spreads on single-A tranches by 30 basis points and triple-B tranches by 40 basis points.
The report didn’t provide average spreads for new CLOs issued in the first half, but it did indicate where one of the most recent deals, Dryden 32, priced in May: the triple-A tranche printed at 140 basis points over its benchmark, the double-A tranche at 200 basis points, the single-A tranche at 275 basis points and the triple-B tranche at 360 basis points.
While these levels are tight compared with U.S. CLOs, European CLOs have lagged spread tightening in other kinds of European ABS since late 2013. Barclays thinks that this is likely due to relatively high issuance of CLOs. In the first half of this year, 6.9 billion of European CLOs were issued, nearly as much as the 7.7 billion that was issued for all of 2013. Barclays expects the full-year 2014 total to reach 12-15 billion.
Barclays expects issuance of other kinds of European asset-backed securities will be further reduced going forward, in part because of plans by the European Central Bank to step up its purchases of ABS. Going forward, this lack of supply will actually benefit CLOs as investors focus their attention to the sector as an alternative. “We estimate that the additional demand for European CLOs due to depressed issuance in other European ABS sectors could exceed 5 billion,” the report states.