That may soon end up impacting the equity arbitrage — the gap between the yields that CLO managers can earn on the loans they buy and the bonds they sell — which may hurt new issuance in the coming months. It’s also sent more managers into the secondary market, where about 60% of loans now trade above par, making it that much harder to find bargains to put together a portfolio.
The US$1.3 trillion ($1.76 trillion) collateralised loan obligation market is about to become a victim of its own success because managers can’t create the bonds fast enough to meet demand and are running out of things to buy.
A slowdown in mergers and acquisitions after borrowing costs rose is continuing to deprive the lenders of the leveraged loans that the industry was built on. About US$311 billion of M&A deals have been announced and completed so far this year, roughly US$1 trillion below the same level two years ago when interest rates began to rise, according to data compiled by Bloomberg.
