A few weeks ago, I noted it was sellers market in credit. Since then, the market has had some very heavy days and some rather strong days. A few deals have even been pulled from the market on the bond side. With that said, the primary market was hefty to say the least, settling a monthly record with over $47.5B of paper being priced according to JPM. Winners in the month were trading names typical of this stage of the cycle with names like Petroplus, Ambac, Affinion, and Geokinetics seeing large price moves higher.
Leveraged loans also delivered a strong month. And frankly, the technicals felts a lot stronger than the high yield market. According to JPM, $34B loans priced during th emonth making it the 12th most active month ever. For the year, the CSFB Leveraged Loan index is up 7.80% with JPM reporting leveraged loans have gained 8.66% year to date. All in all it was a very strong month (and so far year) for leveraged finance.
One vehicle that also shined this month were CLOs. 13 new CLOs priced in September with a total value of $6.2B. On a year to date basis, $32B of CLOs have priced which is nearly 3x as much as last year. This is still a far cry from the nearly $90B that priced in 2007. Just today LCD reported yet another CLO being priced by Och-Ziff with AAA garnering a L+148 coupon. I am hearing the forward pipeline is very strong with underwriters and arranging banks pushing the product hard on asset managers. Less reported, but still widely important: Secondary CLO spreads tightened up and down the capital structure.
I often talk about uneconomic sellers being the path to riches in investing. Find someone that HAS to sell, provide that seller with liquidity at a steep discount, profit. Capitalizing on problem or issue that has no impact (or very little impact) on the intrinsic value of securities is a profitable endeavor. The opposite is also true: Buying as asset or asset class because you have can be a terrible UNPROFITABLE endeavor. If a high yield manager is doused with inflows, he or she may have to put that capital work into a well-bid market where all of their peers have the same problem: Too much capital, not enough liquidity/sellers, buying assets higher.
When you think about the data I listed above of $6.2B of new CLOs vs $34B of primary loan issuance you wouldn't think there would be a problem. But then you start ticking off other salient factors:
- According to JPM, $9B of paper was paid down during the month (amort, bond for loan issuance)
- Refinancings accounted for nearly 50% of volumes in September
- There was an additional ~$1B capital coming into the asset class via retail inflows and possibly more from non-bank / non-CLO participants