US Market Commentary: CLO Q&A with Capra Ibex's CIO on mezz/equity valuations while navigating price drops and cooling down of new issues, repricings.

In an exclusive LFI interview, Michael Kurinets, chief investment officer and portfolio manager at Capra Ibex Credit Opportunities, explained several key challenges the CLO market is facing as well as the opportunities more volatile markets present. Capra Ibex offers fixed-income advisory services as well as CLO mezzanine and equity investment programs.

The current CLO market has seen a weakening of spreads across the capital structure, with Double Bs widening 50-100bps and Triple As by 20-30bps from earlier this year when the market flirted with post-GFC tights. This widening reflects broader adjustments in credit markets, influenced by the unknown impact of upcoming tariffs. Specifically, there is uncertainty regarding the tariffs that are expected to be announced by April 2 in Europe, whose reciprocal nature is not yet clear. While tariffs with China have historically not impacted the US economy significantly, the recent announcements regarding tariffs with Canada and Mexico have surprised the markets.

If these tariffs lead to inflation or spikes in unemployment, their long-term benefits will be difficult to justify, and credit markets may face further challenges. This could affect structured products such as CLOs, CMBS and ABS, as well as more liquid products like corporate bonds. The spread movement observed so far is considered an initial step in the adjustment process, with markets bracing for potential negative impacts. As the economic implications of these tariffs remain uncertain, continued volatility is anticipated as markets seek to understand their effects.

Regarding new CLO managers, there is no strong consensus on whether their deals will be postponed. Despite wider debt printing, major dealers like Goldman Sachs are expected to market these deals, as CLO managers can acquire assets at lower prices, potentially offsetting wider liabilities. In the primary market, a bear case scenario suggests that new-issue volumes may slow, particularly for tier-one managers and smaller players with volatile past performance, while the secondary market sees high trading of Triple As and Single As at a premium. Opportunities may arise from CLO equity in new issues, especially if managers need to divest equity stakes amidst market volatility.

LFI: Where are CLO prices in the current market?

Capra Ibex: We're now clearly off the tights. Earlier this year, we flirted with post-GFC tights in the CLO market. Now, we're clearly wider across the capital structure—50-100bps wider on Double Bs and 20-30bps wider on Triple As. The rest sort of interpolates between those points.

LFI: What are the takeaways?

Capra Ibex: Credit markets are adjusting to something. People are pointing to the unknown impact of tariffs. Until April 2, we won't know what the tariffs will be in Europe or how reciprocal they'll be. The market doesn't like tariffs in general, but isn't overly concerned about those with China. They've been around for a while and haven't really impacted the US market economy so far. The announcement of tariffs with Canada and Mexico surprised the markets. People seemed to have understood the tariffs with Mexico, but not with Canada, as the reasons cited were more about fentanyl than trade imbalance.

LFI: What does this mean for the CLO market?

Capra Ibex: If tariffs become inflationary or cause spikes in unemployment, it will likely become hard to argue for their long-term benefits. Revenue-based funds won't be enough, and credit overall will likely face an additional leg down, impacting everything from structured products like CLOs, CMBS and ABS to more liquid products like corporate bonds. The spread movement so far is not significant and is likely only an initial step to an adjustment that will be needed. The market's preparing for something bad that might happen.

LFI: In terms of market direction, where are we going?

Capra Ibex: We don't know. Tariffs haven't been announced, and their impact on the US economy is not clear, so we expect continued volatility while the markets figure out the economic impact of tariffs.

LFI: What about new CLO managers? Will their deals be pushed back?

Capra Ibex: I don't have a strong opinion. If new CLO managers announce deals, major dealers like Goldman will certainly market them. These CLO managers are likely prepared to do several deals, even if their debt continues to print wider. Dealers will likely say that while liabilities are printing wider. CLO managers are picking up assets at lower prices, so CLO equity investors aren't necessarily worse off.

LFI: Any scenarios on spreads for the primary market? Capra Ibex: The bear case for primary new issues is that volumes slow down. If you're a tier-one manager today, it might just be harder to print deals. For smaller managers or those that have had volatile performance in the past, the market may effectively close for a time. Triple As in the secondary market are trading high, and Single As at a premium. Corporate actions like resets and refis will inevitably slow down.

LFI: Price levels for Triple As and Double Bs? Capra Ibex: Triple As are a liquid cash substitute, attracting buyers as long as spreads are 100-150bps over riskless. Double Bs are different. Buyers want yields approaching from mid-to-high single or double digits, but these investors worry about credit. Despite historically low impairment rates, some BB CLOs that have low MVOC today are not likely to be money – good if the US economy takes a turn for the worse.

LFI: Opportunities in the first half for new issues or secondary markets?

Capra Ibex: Opportunities might come from CLO equity in new issues. If some CLO managers need to sell a minority stake in equity and the market lacks support, we’d be interested. Volatility creates windows for differentiated pricing between the CLO manager or captive capital and independent third-party investors.

LFI: Returns for CLO equity in 2025?

Capra Ibex: Returns likely won't match last year's 19%. Cash flows might be similar, but price changes won't be as good due to current uncertainties like tariffs in the market.

LFI: Final thoughts ?

Capra Ibex: There are too many unknowns. Those who manage money with leverage, I would reduce the leverage. Reduce duration and reduce exposure to riskier credits. Last year’s concern was the election; this year, it's tariffs and their economic impact. Most economists claim that tariffs aren't beneficial, but this administration clearly disagrees, claiming tariffs could be beneficial to the US, as a dominant trading partner, and correct long-standing unfair trading imbalances. It's complex, and no clear evidence proves either side conclusively wrong, so better to play it safer. Fortunately, for experienced investors, the CLO market offers opportunities to align safety with excess performance.