EN Colombia Professional Investor
Public Fixed Income

Structured Credit: Engaging Risk Tactics

October 2019 - 2 min read

Deal flow remained steady in Q3, keeping primary market spreads range-bound. Against a backdrop of low global interest rates, we have seen increasing investor interest in European CLOs.


Steady New Issuance in Primary Markets
The issuance of new CLOs has remain steady throughout the year. However, August was the only month of the third quarter that experienced a reduction in new issuance over the previous year. Only 16 CLOs totaling $7.1 billion, were issued in the U.S. and no new European CLOs were priced in August. Throughout the rest of the quarter, steady deal flow kept primary market spreads range-bound mirroring the trend seen thus far in 2019.

The secondary market became more bifurcated as the quarter progressed, and market participants made a bid for top-tier manager deals backed by strong collateral pools. It is worth noting that we witnessed a large dispersion of CLO spreads at the BB tranche level in the secondary market. Bonds from well-known managers with attractive credit profiles have traded with a discount margin (DM) ranging from the high 600s to low 700s, while bonds from lesser-known managers with credit profiles showing signs of weakness have traded with a DM in the mid-700s to low 800s.

Shorter-Lived Deals in High Demand
The CLO market has seen an increase in demand for deals with a shorter (i.e. 1–2 year) reinvestment period, versus the traditional 5-year reinvestment period included in newly issued CLOs. Many managers are willing to fulfill this demand, since it likely means that their AAA debt will price at a tighter spread than the AAA debt of a traditional 5-year. This lower pricing is beneficial to a CLO manager, as well as the CLO’s equity tranche holders, since it lowers the structure’s overall cost of debt—thereby creating excess spread that equates to higher equity returns. New 5-year AAA CLOs are being issued at spreads of 130–135 basis points (bps), while the shorter profile AAAs are pricing with a DM of 112–125 bps.

AAA U.S. CLO Primary Market Curve:
Effect of Deal Lifespan on Pricing

AAA U.S. CLO Primary Market Curve, Effect of Deal Lifespan on PricingSOURCE: LCD. Red data points represent third quarter deal pricings. As of August 31, 2019.

European CLOs Look Attractive
As macroeconomic headwinds continue to pressure markets, investors are attempting to find a port where they can weather the anticipated storm—although finding one with attractive yields is proving difficult. With some global interest rates now in negative territory, investors are increasingly attracted to European CLOs that have a built-in structural feature that protects against negative rates, in the form of a 0.0% EURIBOR floor. As EURIBOR has trended further negative, the Euro CLO coupon payments have remained unchanged, providing steady yield—while comparable asset classes with no reference rate floors have continued to fall. The higher demand for steady yields has resulted in tightening new issue spreads for Euro CLO senior tranches. We are likely to see an increase in refinancings and/or resets in the European CLO market as a result of the tighter spread environment. 


  • We expect new issue CLO spreads, up and down the capital structure, to remain relatively range-bound through year-end. While investors continue to focus on both macroeconomic risks—including global growth and trade tensions with China—and idiosyncratic risks in portfolios, the all-in yields for CLO debt tranches remain attractive relative to other asset classes. 
  • In our view, a muted new issuance calendar, as a result of a challenging environment for CLO equity arbitrage, should be supportive of spreads. 
  • Given investors’ bias toward new issue CLOs with less risk in the underlying credit portfolios, we could see some continued weakness in seasoned mezzanine tranches with larger exposures to more recently storied credits. 

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.



We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.