/perspectives/sector-views/abs-clos-pockets-of-opportunity-structured-credit

Asset-Backed Securities and CLOs: Pockets of Opportunity in Structured Credit

Relative pricing versus corporates remains attractive.

November 20, 2023


This Asset-Backed Securities and CLOs sector report is excerpted from the Fourth Quarter 2023 Fixed-Income Sector Views.

Structured credit remains a meaningful allocation across our strategies, particularly as spreads remain wide relative to corporates. Our broader defensive tilt aligns well with the investment opportunity set, which currently exhibits discounted dollar prices, high levels of current income, and conservative credit profiles, providing the opportunity to maintain total return upside with often reduced volatility.

Looking forward, increased pressure on loan market fundamentals will disproportionally impact junior CLO tranches and underpins our preference for senior risk given attractive yields and the relatively low level of credit risk. The credit spread on senior CLO AAA tranches tightened from 200 basis points to 175 basis points in the third quarter, generating positive price performance and increasing deal sponsors’ incentives to issue new deals—quarterly issuance rose to $36 billion from $22 billion in the prior quarter—and refinance 2022 vintage deals with historically high coupons. After roughly $50 billion in net downgrades of bank loan collateral year to date, 7 percent of CLO collateral is currently rated by S&P at CCC or below, compared to 5 percent at the start of the year. Another 6 percent of CLO collateral is rated B- and on negative outlook. With interest costs for bank loan issuers expected to remain at elevated levels, we expect borrowers’ free cash flows to remain pressured and credit rating downgrade trends to continue in the near term.

We see economic and policy challenges in the consumer ABS market, particularly subprime. However, the approximately $250 billion commercial ABS market is currently among our higher conviction investment areas as positive supply/demand dynamics complement favorable valuations. Higher interest rates, low capital expenditures, and subdued mergers and acquisitions activity have decreased year-to-date commercial ABS issuance volume by 27 percent compared to last year. Primary markets are focused on data centers, fiber, and triple net lease properties, as issuers managed maturities and selectively continued originations. With commercial ABS maturities not slated to pick up until 2026, low supply expectations are supporting valuations. Commercial ABS credit spreads are historically attractive—ranking above the 70th percentile both on an absolute basis and relative to similarly rated corporate bonds. The ICE BofA AA-BBB ABS Index offers a 7.16 percent yield as of quarter end, while senior commercial ABS with defensive underlying collateral have recently traded between 6.5–7.0 percent yields. We remain focused on high-quality ABS backed by investment-grade rated corporate obligors or staple defensive assets, such as quick service restaurant royalties. Given recessionary and idiosyncratic risks, commercial ABS offers a unique opportunity to capture complexity premiums in subsectors that require scrutiny across sponsors and structures.

Commercial ABS Yields Are at Multi-Year Highs

Commercial ABS credit spreads are historically attractive—ranking above the 70th percentile both on an absolute basis and relative to similarly rated corporate bonds. The ICE BofA AA-BBB ABS Index offers a 7.16 percent yield, while senior commercial ABS with defensive underlying collateral have recently traded between 6.5–7.0 percent yields.

Commercial ABS Yields Are at Multi-Year Highs

Source: Guggenheim Investments, Bloomberg. Data as of 9.30.2023.

—By Michael Liu, Scott Kanouse, Dominic Bea, and Pooja Shendure

 
Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

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.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2023, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

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Investing involves risk, including the possible loss of principal.

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.

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