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
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*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn.
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