December softest month of year for U.S. CLO supply; volatility pushes deals to 2019

By Cristal Cody

Tupelo, Miss., Dec. 24 – The CLO markets ended Monday with little activity seen ahead of the Christmas Day holiday.

The financial markets closed early for the session and will remain closed on Tuesday.

December has been the “softest month of the year for U.S. CLO pricings, with new and reset CLO activity logging only about 40% of their 2018 average monthly levels,” Fitch Ratings said in a report released on Friday.

“As of mid-December, the balance of deals expected to price in the fourth quarter is just under $26 billion for new U.S. broadly syndicated loan CLOs, with an additional $21 billion in resets,” Fitch said. “It is the highest annual level recorded for new issuance, according to Fitch Ratings collected data.”

Meanwhile, though middle-market CLO issuance has been subdued in the last month of the year, the “annual activity of more than $16 billion as of mid-December is already the most recorded since the financial crisis,” Fitch said. “Volatility in the market is driving some planned issuance to the 2019 calendar, but it has also created opportunities for reverse-inquiry transactions recently.”

Moody’s Investors Service said in a report released on Monday that U.S. broadly syndicated CLO issuance will continue to be strong in 2019 but will normalize with more moderate levels of resets, refinancings and reissues.

Risks to U.S. CLO issuance include a sudden weakening in the U.S. economy and severe geopolitical events, such as a further trade war escalation, according to the report.

In Europe, supply is expected to be dampened in the year ahead, Moody’s said.

“Issuance volume will not exceed this year's record level,” Moody’s said. “While we expect new CLO issuance to remain strong in 2019, we expect it to approach but not exceed the level of issuance in 2018. European CLOs issued in 2019 will closely resemble their 2018 counterparts, but with some deterioration in collateral quality and transaction structures.”

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