Leveraged loans: Arb windfall for cash CLOs
Repricing in the leveraged loan market means that some CLO managers have been having a field day.
There were not many people in the debt markets with smiles on their faces at the end of August but a few CLO managers were managing to raise a grin. Having long lamented the spread compression in the leveraged loan market that was destroying their arbitrage, Christmas came early for some asset managers in July when spreads on senior loans blew out from around 225 basis points to 300bp. When you have locked in term funding at historically tight levels but not yet invested and asset margins suddenly blow out by 30% it must be hard to stop grinning.
The speed with which leveraged loans have changed from a seller’s to a buyer’s market is quite breathtaking – it seems just a matter of weeks since buyers were grumbling about covenant-lite documentation, and they can now practically write their own terms.
Those managers that had launched relatively recently and were still sitting on reasonable cash balances in August were best positioned to take advantage of the situation. According to Deutsche Bank, some European CLOs had sizeable percentages of assets still to be purchased at the time: Wood Street (40%), Cordatus II (35%) and Avoca VIII and Gresham Capital with 30%.