Widening AAA CLO spreads prompted fixed income research analysts JP Morgan Securities to cut their forecast for new CLO issuance in the United States for the end of 2022 to 90-100 billion. of dollars.
In a securitized product research report released on Friday, JP Morgan lowered the new issue supply forecast from the previous projection by $110 billion to $120 billion based on a reduced execution rate of 4 $.5 billion to $6 billion per month in new transactions.
“Liability spreads have reached new highs, a significant hurdle as there are few catalysts for spreads to narrow in the near term, in our view,” the report said.
AAAs have started to trade in the 175-200 basis point range in recent weeks as managers crippled by underwater CLO warehouse lines turn to “print and sprint” options involving mostly loans discounted and HY bonds. (Bond assets bought by CLO managers included quality brands like Apple and Microsoft that had suddenly softened bond prices over the past month, according to recent CLO credit market research from BofA Securities).
Other governors on new deals include lower leveraged loan issuance levels the rest of the year (JP Morgan’s forecast is down to just $315 billion, a 23% drop from year-over-year from 2021) as well as managers ready to sit on about 200 sub-CLO warehouse lines pending more favorable market conditions for CLO issuance.
“There is the possibility of closing or liquidating a warehouse, but this would likely be at a loss depending on the ramp so far,” the report states, “and open warehouses likely have time before they are needed. “.