Please ensure Javascript is enabled for purposes of website accessibility
top of page
  • Writer's pictureCapra Ibex

CLO Insider August 2022: The Market Rally's Reversal

by Mike Kurinets, Chief Investment Officer.


In this month’s CLO Insider, we explore how the CLO and leveraged loan markets reacted to Jerome Powell’s indication that the Fed would likely continue to hike rates aggressively. Powell’s hawkish speech at the Jackson Hole Economic Symposium sobered the markets, halting the relief rally that occurred in July and early August. In the wake of his comments, the markets adjusted to the idea that an economic slowdown may be inevitable.




After increasing 1.7 points from the start of August to mid-August, leveraged loan prices started to decline on the back of Powell’s comments. Loan prices closed the month just 1 point higher than at the start of the month.

Similarly, CLO investors seemed to gravitate towards CLO equities with more time remaining in the reinvestment period. This market preference indicates a concern that the U.S. economy is not out of the woods yet. In addition, despite the increase in loan prices – which made CLO collateral more expensive – spreads on CLO liabilities did not tighten. These dynamics made it difficult to originate new-issue CLOs


Market Rally Reversed After Powell's Hawkish Tone at Jackson Hole


July’s rally persisted through mid-August

Last month’s newsletter described how the market rallied in July after a significant selloff in May and June, even though inflation indicators remained high and the Fed’s fourth rate hike brought the cumulative rate increase this year to 2.25% [*1]. The market rally continued through mid-August, despite another high CPI print, and the market seemed to view its significant selloff in May and June as an overreaction. During the second half of August, as the annual end-of-summer economic summit in Jackson Hole neared, the relief rally ended. At the summit, Jerome Powell signaled that the Fed would likely need to adopt additional large rate hikes to control inflation. The market immediately repriced assets lower to reflect the reality that the Fed will continue to act aggressively to stem inflation and that, therefore, an economic slowdown may be unavoidable. As part of this market adjustment, leveraged loans and CLOs traded at lower prices. By the end of August, loan prices had increased 1 point from the start of the month. However, during the middle of the month, prices had been up by 1.7 points.


Investor preference leaned towards longer-dated CLO equities

While all CLO equities traded well for most of August, most of the investor appetite focused on CLO equities which have over three years remaining in their reinvestment periods (rather than on shorter CLO equities which have less than one year remaining in their reinvestment periods). This preference towards longer CLO equities indicates that, despite the recovery that occurred from the middle of July through the middle of August, many market participants remained concerned that the U.S. economy had not yet turned a corner and that significant issues may still arise in the near future.


New-issue CLOs struggled to print as loan prices increased but CLO liability spreads did not tighten

Though prices in the leveraged loan market ended the month one point higher, spreads on CLO liabilities did not tighten. As a result, new-issue CLO origination struggled because managers had to purchase loans at higher prices while the cost of CLO debt did not decrease. This combination of market forces raised the prices at which new-issue CLO equity could be created, while cash flows to CLO equity would not increase.


There was no reset or refinancing activity in August.


According to Morgan Stanley, spread movements in August were as follows [*2]:

Footnotes:


[*1] The Fed raised rates by 25 bps in March, 50 bps in May and 75 bps in both June and July.


[*2] Information from Morgan Stanley CLO Trading Desk, in “Morgan Stanley CLO Commentary” released July 29, 2022.



Forward Looking Statements

Some of the statements contained in this presentation constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The forward-looking statements contained in this presentation reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances, many of which are beyond our control, that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking: the use of proceeds from our public and private offerings (as the case may be); our business and investment strategy; our projected operating results; our ability to obtain financing arrangements; financing and advance rates for our target assets; our expected leverage; general volatility of the securities markets in which we invest; our expected investments; effects of hedging instruments on our target assets; rates of leasing and occupancy rates on our target assets; the degree to which our hedging strategies may or may not protect us from interest rate volatility; liquidity of our target assets; impact of changes in governmental regulations, tax law and rates, and similar matters; availability of investment opportunities; availability of qualified personnel; estimates relating to our ability to make distributions; our understanding of our competition; and market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy. While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes. This presentation contains statistics and other data that has been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data.

Disclaimers

This confidential document is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities or partnership interests described herein. Interests in Capra Credit Management, LLC (“Capra”) partnerships may not be purchased except pursuant to the partnership’s relevant subscription agreement and partnership agreement, each of which should be reviewed in its entirety prior to investment.

コメント


bottom of page