Asset-Backed Securities (ABS) and Collateralized Loan Obligations (CLOs): The New Issuance Engine that Could
CLO new issuance is on track for a record year; esoteric ABS gains in popularity.
CLO spreads widened due to heavy new issuance supply throughout the third quarter. Year-to-date CLO issuance is currently outpacing 2017 by $18 billion and has pushed CLO spreads to the widest levels in the last 12 months.
High New Issue, Refi, and Reset Transaction Volumes Have Pressured CLO Spreads
Year-to-date CLO issuance is currently outpacing 2017 by $18 billion and has pushed CLO spreads to the widest levels in the last 12 months.
Source: S&P Global Market Intelligence, Guggenheim Investments. Data as of 9.30.2018.
Robust supply is likely to continue: the removal of risk retention requirements offers market access to smaller managers, and the favorable economics of refinance and reset transactions encourages activity from existing CLO equity investors. From a fundamental perspective, CLO documentation standards remained relatively unchanged in the third quarter. A recent rating agency whitepaper called attention to increased leverage in CLOs’ bank loan collateral. As a result, that rating agency decreased the recovery assumptions for future loan defaults. While we do not expect the decreased recovery assumptions to immediately impact rating methodology, we are closely monitoring those collateral trends at this late stage in the credit cycle.
The esoteric ABS market continues to grow and currently stands at $22.5 billion. New issuance of franchise finance, structured settlements, maritime container, aircraft, and a collateralized fund obligation ABS were all successfully marketed, as esoteric ABS continues to benefit from a broadening investor base. The increased attention has driven spreads in some sectors to post-crisis tights, and in the case of franchise finance to spreads comparable to investment-grade corporate bonds. In this rally, we remain focused on less-followed subsectors in which we can capture information premiums instead of taking on additional credit or leverage-based risk.
Non-Restaurant Whole Business ABS Market Share Is Growing
The esoteric ABS market continues to grow and currently stands at $22.5 billion. The restaurant market share has grown over time, but non-restaurant businesses have recently accessed whole business ABS markets to meet financing needs. That market has grown from $3.2 billion in 2017 to $5.1 billion so far in 2018.
Source: Guggenheim Securities. Data as of 9.30.2018.
We currently find value in short-tenor CLOs and select esoteric ABS. CLO supply pressures have flattened the term curve for CLOs to the point where defensive short-spread duration CLOs are now comparably priced to riskier longer-spread duration CLOs. We will remain focused on esoteric commercial ABS in the fourth quarter.
—Peter Van Gelderen, Managing Director; Josip Zdrilic, CFA, Director
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-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 risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2018, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
March 07, 2019
Late-Cycle Drama Is Unfolding
Risk assets will likely enjoy another rally while the Fed stays on hold, but the pause will only allow excesses to become more pronounced.
January 24, 2019
Amber Lights Flash at Davos
Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.
Portfolio Manager Adam Bloch and Macroeconomic and Investment Research Group Director Matt Bush share insights from the first quarter 2019 Fixed-Income Outlook.
Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 12.31.2018 and includes leverage of $12.4bn. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such 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. All content has been provided for informational or educational purposes only and 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. Investing involves risk, including the possible loss of principal.