Primary new issuance reaches highest level since Russia's invasion of Ukraine

European CLO primary new issuance has reached the highest level since the Russian invasion of Ukraine two years ago, which led to steep rises in inflation and central bank base rates. 

The aggregate value of European deals reached €11.35bn in the first quarter of 2024, according to SCI data, the highest figure since the €12.97bn of new issuance witnessed in Q4 2021. The quarterly figure is also the second highest amount recorded by SCI over the past five years and the highest Q1 figure during that time frame. It marks a 69% increase compared with the same period in 2023.

New issuance has grown beyond the expectations of even a few months ago, says Andrew South, head of EMEA structured finance research at S&P Global Ratings. The ratings agency had been anticipating that issuance would be relatively flat compared with last year, he says. Instead, its team has been particularly active in recent months, given that it rates the majority of CLOs in Europe.

The trend is reflective of similar levels of activity in the US, according to S&P’s most recent US Structured Finance Chart Book, issued in March. The agency’s research showed US CLO new issuance in the first two months of the year reached US$33bn, compared with US$23bn last year and US$20bn in 2022.

“Banks and institutional funds continue to be actively investing in triple-As and double-As,” says Jonathon Siatkowski, head of CLO capital markets at Marathon Asset Management. “In 2022, and 2023 most large US banks were absent, but we have begun to observe banks coming back. With Basel III capital charge implementation later this year, we expect to see more sustained activity.”

He adds: “ETFs have entered the space as well and are increasingly involved players. Overseas triple-As like Japanese banks and European investors have gradually increased their investments for the last few years and are expected to continue their investing.”

Siatkowski says that within mezzanine tranches, insurance companies have shown strong interest, finding CLO double-A, single-A, and triple-B attractive on a relative value basis compared to ABS and fixed rate corporate bonds. 

“Most notably, the net interest margin available for CLO equity improved dramatically as spreads snapped in, resulting in CLO equity models producing much stronger front-end cash-on-cash distributions,” says Siatkowski. “This has led to robust interest for equity, including minority equity.”

Despite the significant uplift in European issuance since the start of the year, S&P’s South points to the resilience of the market throughout 2023. He highlights how approaches may evolve as lending markets return and the macroeconomic picture continues to stabilise.

“Last year, issuance surprised to the upside too,” says South. “If you looked at how little leveraged loan issuance was going on, the fact that CLO issuance was where it was — at around €26bn – was a bit surprising. It was a function of managers innovating by buying more in the secondary market for example.”

Last year was broadly a case of emptying warehouses that were already in place, South says. He says that, as a result, this year’s issuance was not expected to exceed those levels.

“Actually, it has been stronger than at this point last year, and that probably is driven by the recovery in the leveraged loan space,” says South. “In mid-2022, speculative grade corporate issuance fell off a cliff. That has recently recovered almost to longer-term average levels, and that clearly helps CLO issuance. It’s partly driven by slightly increased M&A activity, among other factors.”

Indeed, Baker McKenzie forecast in its Leveraged Finance Annual Report 2024, published in February, that M&A activity will return “with a vengeance” this year. The law firm anticipates that, as interest rates stabilise – albeit at higher levels than those seen between the global financial crisis and the start of the war in Ukraine – buyer and seller views around valuations will align. M&A activity, it says, will be “rekindled throughout the markets”.

However, Marathon’s Siatkowski highlights that the year ahead will bring uncertainty for CLO managers, as well as opportunities. “Oscillations in interest rate expectations, geopolitical concerns, and the upcoming US elections are likely to create pockets of volatility in the loan and CLO markets, which will create opportunity for new and recently issued CLOs,” he says. “This will support CLO equity capital supply, but with a preference for CLO managers with a track record over multiple cycles and CLO portfolios deemed to be more-conservative or defensive by market participants.”

Kenny Wastell