Global CLO issuance in 2021 was one for the history books, with issuance for that year 59% higher than the previous peak of 2017. With $535bn of issuance, split between $230bn of new issuance and $305bn of refis and resets, the CLO universe started 2022 with an outstanding notional of just over $1tn, roughly split 80-20 between US and European deals.
As 2021 proved, once again, the resilience of this product, it also revealed a more complicated story when looking under the surface as certain rating agencies updated their methodologies resulting in extended cherry picking of ratings by certain managers. In addition to that, junior coverage tests started disappearing from a number of CLO structures, ESG language started making its appearance in the CLO documentation while detailed negotiations between CLO managers and investors over a large variety of stipulations was also a notable feature of the year.
Starting 2022 we anticipate all these issues to remain prevalent although total issuance should be lower, with refi/reset volumes closer to the historical ‘norm’. The replacement of Libor with SOFR is apparently causing a slower start to the year for US issuance but a market consensus should emerge in the coming weeks and help remove this stumbling block. The ESG language is expected to need a much longer period before a set of dominant designs emerge but, so far, CLO managers have largely adapted to the new reality by using exclusion language or by starting to develop their own ESG rating methodologies.
After the widening in spreads seen in H2 2021, we expect to see a modest tightening in early 2022. The benign credit environment and ample liquidity suggest that the levels of supply anticipated can be absorbed amidst ongoing investor interest in the relatively high returns that CLOs offer compared to other asset classes.