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February 22, 2019  

CLO Trading Soars Amid Refinancing Pause

Secondary-market trading of collateralized loan obligations has suddenly sprung to life.

According to Empirasign, the weekly average supply of formal bid lists in the sector totaled $802.7 million from Jan. 1 to Feb. 15 — versus $525.9 million for all of 2018. Sources attributed the growth to a number of factors, including the broader financial market’s late-year volatility and a slowdown in deal refinancings.

“The bid is back,” one trader said.

For the most part, CLO trading had been slow since early 2017 — primarily because of surging refinancing activity that distracted investors and dealers. But with wider new-issue spreads dampening that production, industry participants think the increased secondary-market action could last a while.

To be sure, CLO trading will dip during the Structured Finance Industry Group’s “SFIG Vegas” conference in Las Vegas on Feb. 24-27. It was accelerating in the weeks leading up to the gathering, however, and is seen as likely to regain momentum in the weeks ahead.

Consider that the week of Feb. 11 was the busiest this year in terms of CLOs offered for sale on the secondary market, at $1.2 billion. Coming off the Presidents’ Day holiday, another $364.2 million was up for grabs on Feb. 19 and 20.

As for financial-market volatility, one investor said that as the values of mezzanine CLO securities fell by about five cents on the dollar in December, to 94 cents, buysiders were lured into the market. And while the prices of those bonds since have recouped most of their losses, opportunities could remain.

That’s in part because CLOs that are refinanced or called for other reasons are repaid at par value. “A lot more options develop when you have bonds that are past their reinvestment period, are amortizing down or are trading at significant discount to par because they were issued at much wider coupons,” the investor said.

The stronger CLO trading contrasts with activity among other types of structured products. Secondary-market offerings of mortgage bonds fell to $962.9 million during the Jan. 1-Feb. 15 period, for example, from $996.5 million in 2018.