(Bloomberg) -- Rising uncertainty spurred by hawkish central banks and geopolitical tensions have spilled over into Europe's CLO market, holding up one offering and driving coupons higher for the riskiest debt in newly-minted deals.
After opening the year on a strong note with tight pricing for an initial clutch of deals, collateralized loan obligations -- one of the most resilient parts of the credit markets this year -- are starting to feel the strain.
A 414 million-euro ($471 million) reset from Oaktree Capital Management was recently shelved, with the company citing market conditions for the decision. A representative for arranger Barclays said there are no updates to provide, while Oaktree declined to comment.
Coupons for the speculative parts of CLOs have risen to an average of 654 basis points over Euribor for BB debt sold last week and as high as 919 basis points for B notes, according to data compiled by Bloomberg. Both are higher than the pricing seen for the first batch of deals at the start of the year and above December averages.
The more expensive junk-rated debt coupons, which come on top of face value discounts, may weigh on spreads for the top-rated -- and also the largest -- CLO tranche, resulting in elevated funding costs. It may also lead to a pause in issuance if deals become uneconomical.
“Investors are reticent to take sub-investment grade exposure, leading to visible softening of spreads,” Bank of America strategists led by Alexander Batchvarov wrote in a note. They “may also be questioning the timing of taking on senior exposures,” he said.
Overall funding costs for new CLOs hovered around 186 basis points for deals that priced last week, not counting a transaction from Apollo Global Management's Redding Ridge Asset Management, which didn't have a B tranche. That's close to where CLOs ended the year in 2021.
Europe's CLO machine is sputtering this week, with only one new issue printing, compared with eight deals in the past two weeks. Overall, nearly 4 billion euros in new deals have priced this year so far, compared with 4.6 billion euros for the first two months of 2021, Bloomberg data show.
Still, for some investors the spread widening represents a buying opportunity.
“This is quite attractive as the underlying collateral in CLOs is still performing and the floating-rate structure protects against higher interest rates,” said David Altenhofen, senior portfolio manager at Pensiondanmark A/S.
Away from the primary markets, secondary volumes reached 585 million euros, making it the busiest week since June 2020, according to Bank of America. Of that, just above half actually traded.
“Strong supply and lower demand due to rates uncertainty led spreads to widen across the capital structure,” the BofA analysts said.
Elsewhere in credit markets:
EMEA
Six issuers tapped Europe's investment-grade primary markets on Thursday for a minimum of 2.6 billion euros.
- All of the sales are coming from the financial sector and four borrowers are offering seven-year notes
- In the leveraged space, junk-rated loans are trading at the lowest since January 2021, according to the S&P European Leveraged Loan Index
- Banks are turning to private credit markets to help them offload riskier parts of the deals they underwrote before markets turned sour
Asia
Chinese high-yield dollar bonds fell 1-3 cents on the dollar Thursday, according to credit traders, putting them on track for a fourth day of declines.
- Shimao Group Holdings Ltd. is seeking to extend repayment on about 6 billion yuan ($947 million) of high-yield trust products over three years. That's a reminder of the troubled Chinese property industry's mounting stress, which the firm appeared to have largely skirted until recent months.
- Lending money to governments with questionable human rights records can hurt investors' returns as well as their ethics, according to risk-analytics firm Verisk Maplecroft.
Americas
Investor participation in U.S. high-grade bond sales was considerably weaker Wednesday with order books less than 2x covered, subjecting companies to an eyebrow-raising 19bps in average new issue concessions.
- Wednesday's pricing results are expected to moderate potential issuance heading into the holiday weekend
- The secondary market for U.S. leveraged loans had two separate BWICs due totaling almost $900 million on Wednesday
- S&P Global Ratings has downgraded Las Vegas Sands Corp. to junk, citing a slower recovery in the Macau gaming market after omicron cases brought a fresh round of business shutdowns.
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