CLOs Have Too Much Money and Are Running Out of Things to Buy

-- The $1.3 trillion collateralized 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.

Demand is so strong that even an 86% increase so far this year in US sales of new issue CLO bonds from the same period in 2023 hasn’t been enough to sate investors’ appetite. As a result, spreads on the AAA debt have compressed by more than 100 basis points over the benchmark since late 2022, when the tranches were reaching eye-popping levels that made equity returns unattractive for investors.

The AI revolution is increasingly being funded in a little-watched part of the debt market, where sales of bonds backed by data centers and fiber-optic cables are soaring. Banks led by Goldman Sachs Group Inc. have launched one of the largest leveraged loan deals this year to refinance BMC Software’s upcoming maturities.

D.E. Shaw is raising its second fund in roughly 16 months to invest in the synthetic securitizations banks issue to manage their capital requirements, one of the hottest asset classes on Wall Street.

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CLOs Have Too Much Money and Are Running Out of Things to BuyThe $1.3 trillion collateralized 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.
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