A notable development in the CLO market in 2023 was the more than doubling of new issuance for private credit CLOs, compared to a decrease of 24 percent for broadly syndicated loan (BSL) CLOs. We expect that private credit CLOs will continue to grow market share in 2024 as the underlying asset class has shown resilient performance and credit enhancement levels are 5–6 percent higher than for BSL CLOs. Private credit CLOs are pricing in the 7.5–9.25 percent yield range for AAA to single-A rated tranches. In this challenging debt service environment, underlying credit performance dispersion will likely increase. We continue to prefer staying senior in the capital structure in the private credit or middle market CLO sector and investing in a select group of experienced managers.
In the ABS market, we favor senior exposures to issuers backed by high-quality commercial collateral. High conviction investment themes include data centers backed by investment-grade tenants, diversified triple net lease real estate, and royalties of recognizable high-quality brands. Certain segments of the consumer ABS market have experienced stress, including downgrades in subprime auto and unsecured loans. Full-year issuance for all ABS increased by 5 percent year over year, fueled by increases in auto and equipment ABS. Commercial ABS issuance in 2023 fell by 28 percent vs. 2022, with declines across all major categories except data center and fiber networks, where robust capital investment fueled demand for financing despite high debt costs. With commercial ABS maturities not expected to pick up until 2026, low supply expectations are supportive of valuations. Commercial ABS credit spreads are historically attractive—ranking above the 90th percentile both on an absolute basis and relative to similarly rated corporate bonds. As of Jan. 30, the ICE/BofA Commercial ABS index currently yields 6.5 percent, and senior commercial ABS with defensive underlying collateral have recently traded between 5.7–6.1 percent. Given both recessionary and idiosyncratic risks, commercial ABS offer a unique opportunity to capture complexity premiums in subsectors that require scrutiny across sponsors and 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. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. 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.