According to JP Morgan’s fourth quarter CLO survey, most investors said that the new issue market offered the best value, despite also flagging the lack of loan collateral in the market as one of three top concerns for the next three months.
The research, which drew on responses from 60 clients, pointed out that despite a record $729.7bn of loan supply this year, 73% of this relates to refinancing and repricing of existing deals, and the net new supply of $193.8bn is more modest.
“With some expecting a light loan calendar in October, asset sourcing difficulties may delay some new issue transactions from pricing,” wrote the analysts.
Compared with the previous quarter, more survey respondents showed signs of risk management, with more of them shortening duration, and going up rather than down in credit quality. Eleven percent of survey respondents said they were looking to reduce risk in their CLO investments in the next six months, the highest percentage since 2014, according to JP Morgan.
But despite these concerns, the new issue CLO market was voted the most attractive investment on a relative value basis, compared with resets and refinancings. Thirty-two respondents said they were positioning their portfolio to new issues, compared with 24 and 21 for reset and refis .
According to one CLO manager, the pace of new issue CLO issuance this year against a tricky loan market backdrop should come with some concerns for investors.
“It raises an interesting question about the pace of CLO issuance,” he said. “At the smaller end of the CLO manager spectrum, there could be a reprisal of some of the challenges seen in 2014, when some guys went over their skis with energy exposures. If you’re small you’re at a structural disadvantage. You have to price a little wider and maybe cut the management fee, so you have to go for more spread on lower rated assets.”
The CLO manager said that his firm has been underweight retail, particularly mall based retail for some time.
“Retail, including the restaurant sector, has historically had a high propensity for defaults. It’s not a great sector to get involved in,” he said. He added that healthcare companies with heavy reliance on government reimbursements were also a credit concern.