Alt Credit Intelligence | Choppy waters forecast
After years of credit markets grinding tighter, something has to give, and as we start 2018 we are beginning to see the first signs of credit fundamentals re-emerging
A rising tide lifts all boats” goes the popular saying, and since the financial crisis of 2007 central banks have flooded the market with liquidity.
In the last five years, defaults have been low, dispersion has been low, and yields have been low.
Liquid corporate credit therefore hasn’t been the most exciting space to be in; in fact, Jim Reed, a strategist with Deutsche Bank in London, said that the 2017 was the most boring year ever in credit.
Active managers and long-short hedge funds have struggled to outperform passive indices in any meaningful way as market beta has been so strong. As a result, investors have been pushed into less and less liquid markets to get the yield they require.
For many credit assets the tide appears to have been slowly rising above its high water marks, but some are seeing 2018 as the year that the tide turns; and as another saying goes: “when the tide goes out, we see who’s swimming naked”. Credit fundamentals have been increasing in importance in the US in particular and we are perilously close to credit managers having to do some real old fashioned credit work…
Structured credit: on a roll
…Moving to actively managed products, demand for CLOs shows no signs of going away, even after a remarkable $143bn of global new issuance in 2017. “We have a full pipeline of new issue deals, refis and resets,” says Brad Larson, global head of CLO origination at Credit Suisse in New York. “Q1 is looking like it will be very busy.”
The major banks are projecting between $90bn and $125bn of CLO issuance for 2018, with most settling in the $100bn to $110bn range.
While CLO debt spreads have tightened dramatically in the last year – US AAAs tightened 26bp in 2017, according to Wells Fargo – the trend looks set to continue in 2018.
“As Libor continues to rise, we expect to see spreads tighten further,” says Hunter Covitz, CLO portfolio manager at Highland Capital Management in Dallas. “Short-dated CLO AAAs currently yield 250bps all-in, which is very attractive on a risk/return basis,” he says…
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Full Credit Outlook – Here