Does the invasion of Ukraine increase the appeal of CLOs?
After the invasion of Ukraine in late February, the CLO primary market in Europe and the US saw a plunge in activity as investors shifted their attention to the emerging geopolitical events that caused a wider repricing of risk. As the news rippled through the credit markets, spreads moved wider and the large pipeline of upcoming CLOs got pushed back, but only a handful of deals were officially shelved. As is customary in these situations, the widening of spreads was accompanied by reluctance of prospective sellers to take losses and with many bonds not trading on BWIC lists but we were successful in identifying attractive opportunities in both US and EUR paper, from AAAs down to single-Bs.
Currently the known unknown is the impact on corporate profit margins due to escalating energy prices, food prices and overall inflation. So far the impact on CLOs is rather limited since most underlying obligors have only an indirect exposure to Russia and Ukraine, but there are a fair number of companies with cost directly affected related pressures, such as the price of raw materials and commodities.
The positive news is that while the market is still evaluating the emerging new landscape, there has been some success recently in placing new-issue transactions in Europe, while visibility is also returning over the CLO pipeline. With the loan prices in both the US and Europe recovering, there is some pressure on the CLO arbitrage, particularly on EU deals, which should keep CLO issuance under control over the near term. Given these dynamics, we remain constructive in our outlook over the CLO market in the coming weeks, as the returns on offer seem difficult to justify by either fundamental or technical factors.
by John Kouretas, Senior Analyst