Recent primary CLO and reset prints at the BB level suggest that demand for BB is very strong. Anecdotally, it appears that numerous investors in the market have a preference for the risk-return profile of the BB tranche. The carry is solid, and the BB tranche has demonstrated resilience across various credit cycles.
To contextualize the DM (discount margin) numbers, consider this: when the 4-week Morningstar LSTA U.S. B/BB Ratings Loan Index’s spread ranged from 390-420 basis points (bp), which matches today’s level, the average BB tranche was priced at 699 bp. This is based on a sample of 503 deals managed by 20 US BSL (Broadly Syndicated Loan) managers, featuring top-tier prints. These deals span from 2012 to 2023.
Recently, the CIFC Funding 2022-V reset saw its BB tranche priced at a DM of 635 bp. Even more notably, the GoldenTree Loan Management US CLO 19 had its BB tranche priced at a DM of 600 bp. The BB tranches of these two top-tier deals were priced much tighter than the historical average. Will this trend continue? More data points are necessary to support the thesis that, in the context of a higher interest rate environment, demand for top-tier deals will persistently exceed supply, thus driving CLO BB spreads tighter than historical norms.
Disclaimers
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The information, research, data, research related opinions, observations and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
