CLO market hit by big pricing declines

Fundamentals in the collateralised loan obligation market have been declining in the US and Europe, despite Fed attempts to help out.

US collateralised loan obligation fundamentals worsened from February to March, with market-value based metrics declining as a result of the sell-off and deteriorating asset ratings, according to a report from fund manager PineBridge Investments.

The exposure to loans pricing below 90 percent shot up, to 32.5 percent from 9.8 percent in February. Exposure to loans pricing below 80 percent also surged in March, to 26.8 percent, from 4.2 percent in the previous month.

New-issue supply fell sharply to $3.4 billion in March, from $9.9 billion the previous month, while refinancing supply came to a near halt, at $400 million, compared with $9.9 billion in February.

Fundamentals in the European CLO market also were negative in March, with the percentage of loans pricing below 90 percent skyrocketing to 77.1 percent from 5.7 percent in February. New issuance fell to €1.2 billion in the month, from €3.3 billion the previous month.

The Fed stepped in earlier this month to help support the CLO market by earmarking as much as a reported $100 billion of its $2.3 trillion lending programme to help investors buy triple-A bonds of so-called static CLOs issued on or after 23 March.

However, these static securities account for less than 2 percent of the CLO universe, said David Zhang, head of securitised products at financial information firm MSCI. Because all sectors now are highly correlated, unlike the 2008 financial crisis, “this time, everything is under stress”, Zhang said.