Isssuance of collateralized loan obligations dipped to dismal levels in July, but is already beginning to make up for it this month, according to a report released this week by Royal Bank of Scotland analysts.
Last month just $3 billion of CLOs were issues, the lowest level since July 2012, when issuance was $2.2 billion, the analysts said.
August, however, has already seen $4.5 billion of new CLOs price. With this recent surge, year-to-date issuance now stands at $50.6 billion with 104 transactions, which is just $5 billion shy of the total for all of 2012.
However, this recent surge is probably going to be short-lived given the market dynamics of a typical summer lull that is currently exacerbated by wider senior spreads, a phenomenon that has not seen any real changes over July, the bank said.
Specifically, the bank warns that new-issue senior CLO tranches are too wide relative to their risks, stating that triple-A, double-A, and single-A spreads are all trading close to six times wider than their tightest levels in 2007. Meanwhile, all debt rated triple-B or lower is only trading about two times to three times wider. Additionally, the all-in loan spreads are only about two times wider, even with the addition of Libor floors that has squeezed projected equity returns, RBS said.
There's a silver lining: the market dislocation presents a vast relative value opportunity for senior investors, which should illicit fresh CLO allocations in the final months of the year. And the significant retail demand for loans will likely help tighten loan spreads as activity picks up post-Labor Day. All these factors can lead to the tightening of senior CLO spreads, the analysts said.