By Mike Kurinets, Chief Investment Officer
Key Takeaways:
Regional bank concerns returned in May. After the regional bank crisis appeared to subside in April, on May 1, the FDIC took over First Republic Bank and sold it to J.P. Morgan. Several days later, PacWest’s stock dropped 60%.
Debt ceiling and brinkmanship fears regarding a US government default weighed on the market in May. The government avoided default at the very end of May but, up until that time, much of the market debated the implications of a US default.
Inflationary measures showed mixed results in May. The YoY CPI came in at 4.9% vs 5% in April, however the MoM CPI came in at 0.4% [1]. Though the monthly measure was described as a temporary spike, the Fed raised rates another 25 bps in May.
Leveraged loan prices dropped noticeably in May. Loan prices fell 0.8 points due to a combination of renewed concern over regional bank failures and fears of a potential US government default.
CLO liabilities widened in May. Throughout May, the spread on new-issue liabilities widened by roughly 11 basis points.
CLO manager consolidation continued. Angelo Gordon was sold to TPG.
Regional bank concerns resurfaced in May
As we discussed in our March and April letters, after Silicon Valley Bank and Signature Bank both failed within days of each other in March, there was significant concern in the market about the implications should other regional banks fail. However, by the end of March, various news agencies reported that First Republic was no longer looking for a buyer, taking some of the pressure off the market.
Nevertheless, on May 1, the FDIC announced it was seizing First Republic and selling it to J.P. Morgan. Concerns over regional banks resumed. On May 4, shares of PacWest dropped 60% in a single day.
US default concerns weighed on the markets in May
By the middle of May, most media attention turned to the imminent political action required for the US to avoid defaulting on its debt. US Treasury Secretary, Janet Yellen, said that the emergency funds would run out on June 1, while other economists suggested there were several extra days of runway. In either case, the political situation had to get resolved by early June or the US would be in default. This concern was the main reason for the sell-off in the leveraged loan market during the 2nd half of May.
CLO liabilities widened slightly in May
As loan prices sold off in May, spreads on CLO liabilities widened across every part of the CLO capital structure.
No CLOs were refinanced or reset in May.
May spread movements are below [2]:
CLO Tranche Rating | April 28, 2023 (bps) | May 31, 2023 (bps) | May Spread Change (bps) |
AAA | 172 | 182 | +10 |
AA | 230 | 245 | +15 |
A | 305 | 310 | +5 |
BBB | 535 | 550 | +15 |
BB | 930 | 960 | +30 |
Consolidation among CLO managers continued
We believe that it has been well over a year since market conditions allowed for the creation of attractively priced new-issue CLO equity. According to discussions among market participants, most of the CLO equity in the new-issue market is not creatable at attractive prices and is either placed into captive capital accounts or is purchased directly by CLO managers. Independent 3rd party investors, like ourselves, struggle to find value in new-issue CLO equity.
CLO managers that do not have balance sheets to purchase their own CLO new-issue equity and have not been successful in raising captive capital funds are unable to grow their CLO management businesses and originate new CLOs. Subsequently, consolidation among CLO managers has become increasingly common as smaller managers look for buyers.
Below is a list of some of the CLO manager M&A activity since 2019 that we are aware of:
Angelo Gordon was sold to TPG
AIG’s CLO management business was sold to Blackstone
Sound Point bought a CLO management business from Assured Guaranty
Assured Guaranty bought a CLO management business from BlueMountain
Wellfleet was sold to Blue Owl
Marble Point was sold to Investcorp
CBAM was sold to Carlyle
First Eagle bought a CLO management business from Napier Park [3]
Tall Tree’s CLO management business was sold to Benefit Street
Symphony was sold to Nuveen
Carlson Capital’s CLO management business was sold to WhiteStar
CarVal was sold to AllianceBernstein
Alcentra’s CLO management business was sold to Franklin Templeton
In addition, Sculptor, formerly known as Och-Ziff, is rumored to be selling its CLO management business. Similarly, Tetragon is looking to sell LCM.
Footnotes:
[1] YoY CPI is available at https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm. MoM CPI is available at https://www.bls.gov/news.release/cpi.nr0.htm.
[2] Spreads from CitiVelocity.
[3] Napier Park brand remains independent.
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