In the CLO sector, primary market issuance slowed significantly in the second quarter to $22 billion—a 47 percent year-over-year decline—as elevated CLO tranche spreads and rising bank loan prices reduced the economic incentive for sponsors to issue new CLO deals. We expect issuance to remain tepid into year-end and for spreads to remain rangebound. Our preference is to focus on senior CLO tranches given the attractive carry profile and higher credit quality of the tranches. The tiering between top and bottom quartile AAA spreads for new-issue CLOs has increased to 37 basis points compared to less than 10 basis points historically, making it more punitive for lesser-followed managers to issue new deals. Underlying loan fundamentals remain challenged in a higher interest rate environment—net downgrades to CCC and defaults in CLO portfolios in the first half of the year have exceeded 2022 full-year levels. Importantly, recovery rates have trended lower, which could lead to increased volatility for junior CLO tranches. Exposure to healthcare companies and software companies—two of the largest sector weights in CLO portfolios—remain a key focus area due to the elevated level of stress in these industries.
Commercial ABS yields are notably more attractive than similarly rated corporate bonds. The spread differential between commercial ABS and corporate bonds stood at 120 basis points in mid-July, versus a 10-year median of 58 basis points, which ranks in the 89th percentile relative to history. Commercial ABS is a smaller niche market with less liquidity than the corporate bond market, and this lower liquidity means structured credit tends to lag rallies in corporate credit. Since this spread is driven by liquidity rather than fundamentals, we believe it presents an attractive opportunity to increase exposure to certain categories of the ABS market.
Commercial ABS primary market issuance declined 28 percent year to date as issuers avoided borrowing at higher rates. While opportunities in new issue have been modest, investors who have high credit conviction and stepped up to anchor deals were able to achieve favorable allocations. We have been active in data center, fiber, and triple net lease sectors, where we have seen senior investment-grade rated tranches at 6–6.5 percent yields. We expect to see a similar rhythm of issuance over the rest of the year as issuers can no longer defer refinancings or takeouts of non-ABS warehouse debt. Credit performance across ABS is beginning to show differentiation, as some subprime auto and consumer unsecured issuers sustain underlying collateral defaults. Our focus in ABS remains on capturing the complexity premium in commercial subsectors with an emphasis on selecting stronger sponsors and investor-friendly structures.
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This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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*Assets under management is as of 3.31.2024 and includes leverage of $14.5bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC.