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June 14, 2019  

CLO Bid Lists Inundate Secondary Market

Collateralized loan obligation trading surged in early June.

Investors offered $2.6 billion of CLO paper on the secondary market during the first eight business days of the month, spreading the supply across 79 bid lists encompassing 490 positions, according to Empirasign. In terms of the dollar volume of bonds listed, that was more than double the levels seen over the typical eight-day stretch in May. It also marked a jump of about 150% from the same timeframe a year ago.

Trading was especially heavy during the middle of last week. Bondholders circulated 14 bid lists totaling $746.8 million on June 4, so far the busiest day of 2019. June 5 saw 17 lists for $558.7 million, with 11 listings totaling $571.6 million made available on June 6.

Buyers apparently were willing to deal, absorbing 75% of the bonds circulated on June 4, 92% on June 5 and 95% on June 6. But the proportion of bonds changing hands since has fallen to about 40%, suggesting that buyers are getting their fill.

Over the full eight-day period, 82% of the bonds found buyers — roughly consistent with typical levels.

The offerings appeared to be coming from a small group of major investors, including at least one private equity firm. In some cases, the bondholders were attempting to demonstrate to their management that CLOs have remained liquid despite growing reports of exposures to low-quality borrowers. Indeed, economists increasingly have warned that weak corporate-lending standards could greatly exacerbate the next financial-market downturn.

Some of the investors also were aiming to get their books in order. Relatively few were seeking bids only to determine the values of their holdings.

With the added supply, spreads on triple-A-rated notes with five-year lives widened to about 126 bp over three-month Libor this week from 121 bp a week ago. That reversed a gradual tightening pattern since the beginning of the second quarter, as investors sought CLOs as a higher-yielding alternative to corporate bonds and commercial mortgage securities.

Comparable securities were changing hands on the secondary market at 133 bp over Libor at the beginning of April.

No new CLOs priced this week, versus four deals totaling $2 billion last week. CLO issuers in the U.S. have completed 120 new transactions totaling $59 billion so far this year, according to Asset-Backed Alert’s ABS Database. That’s down from $61.4 billion a year ago.