Tight spreads and CLO managers’ desire to get ahead of a September rush may mean the August market lull is once again pushed deeper into the realm of legends.
Arrangers tend to predict issuance will die down in the summer, but this year's deal pipeline suggests otherwise. There have been at least 10 deals in marketing during the past few weeks, as the pipeline has been constantly replenished.
This means a busy market for the first week of August at least. Primary loan issuance has indeed dropped this month, making it harder to ramp up portfolios for fresh CLOs. But the tightening of liability spreads just unlocked resets as an attractive option for a new group of deals: CLOs that priced in the second quarter of 2022, after the invasion of Ukraine but before central banks raised interest rates.
The triple-A tranches of those deals may widen during the reset, but the mezz has tightened enough to make up for it. Many of these deals were also printed with short reinvestment periods that end in 2025, and low leverage — two flaws, from a manager's perspective, that are easy to correct in today’s strong market.
Partners Group and Capital Four have already reset such deals, Trinitas will price one next week, and the managers of six other CLOs with the same profile could follow them in August.
Add to that a bunch of stragglers from the late 2022 and early 2023 cohort that were done at extremely wide spreads across the stack and haven’t got around to resetting. And then there will be a few opportunistic issuers who decide to print a summer deal to avoid the risk of a congested market in September.
This could easily amount to another 10 deals in August. By European standards, that’s far from a quiet month.
Sunbathing investors with a Caipirinha in one hand would be advised to keep their phone in the other.