Widened CLO AAA spreads have driven J.P. Morgan Securities fixed income research analysts to reduce their year-end 2022 U.S. CLO new issuance forecast to $90-100 billion.
In a securitized products research report issued Friday, J.P. Morgan lowered the new-issue supply forecast down from the prior $110-120 billion projection based on a reduced run rate of $4.5 billion to $6 billion per month of new deals.
"Liability spreads have risen to new wides, a significant obstacle as there are few catalysts for spreads to tighten near term, in our view," the report stated.
AAAs have begun to price in the 175-200 bps range in recent weeks, as managers hamstrung by underwater CLO warehouse lines turn to "print and sprint" options mostly involving discounted loans and HY bonds. (Bond assets purchased by CLO managers have included investment-grade brands like Apple and Microsoft that had suddenly softened bond prices in the last month, according to recent CLO credit-market research from BofA Securities).
Other governors on new deals include dwindling levels of leveraged loan issuance the remainder of the year (J.P. Morgan's forecast is now only $315 billion, a 23% year-over-year decline from 2021) as well as managers willing to sit on approximately 200 underwater CLO warehouse lines as they await more favorable market conditions for CLO issuance.
"There is the option to close-out or liquidate a warehouse, but this would likely be at a loss depending on the ramp thus far," the report stated, "and open warehouses likely have time before needing to."
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