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SFIG Vegas: Still a 'tough slog' ahead for U.S. CLO market

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The U.S. market for collateralized loan obligations got off to a slow start this year, and spreads have yet to recover the all of the ground they lost amid last in 2018. Participants at the Structured Finance Industry Group's conference in Las Vegas this week don't expect things to get much easier any time soon.

“It’s going to be a tough slog,” said Scott Snell, a portfolio manager for Tetragon Financial Management.

“It’s a very difficult market" on the primary issuance side, he said. Many institutional investors are on the sidelines, in some cases under pressure from internal risk management teams worried about risks in the leveraged loan market.

Through Feb. 25, issuance was around $21 billion, or about half of the $42.5 billion seen at the same point in 2018. And spreads on triple-A rated securities are in the range of the low-130s to the mid-150s over Libor, with tighter spreads going to more established managers, according to research published by Wells Fargo this month.

At the conference, Snell noted a rise in first-time issuers hitting the market – Snell estimated about 10 - who are contributing to wider spreads, since they “will accept wider spreads as a cost of doing business.” That acquiescence is raising the costs of issuing deals for existing managers, he said.

“It’s a challenging market,” said another panelist, Asif Khan, managing director and head of CLOs for MUFG.

He noted that Japanese investors, some of the biggest buyers of triple-A rated CLO securities, are awaiting the start of their fiscal year to finalize capital plans. The finalization of new risk-retention regulations that could impact the capital treatment of U.S. CLO securities held by Japanese banks also puts a cloud over the market.

(Many U.S. issuers and trade organizations like the Loan Syndications & Trading Association, have expressed confidence the rules will not ultimately apply to CLO assets for Japanese banks, however.)

Gretchen Lam, a portfolio manager for Octagon Credit Investors, was more upbeat, although she conceded that she would describe the current CLO market as "trying to recover from whiplash in the first three weeks of January,” when no deals priced.

But a bright spot is that spreads for new loan issuance are more attractive than "the existing loan universe, and that generally should be supportive” for more loan issuance to maintain a relatively modest loan supply over the next couple of months for the CLO market, Lam said.

“The engine is humming,” she said.

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