As year-end fast approaches, attention is turning toward the outlook for the CLO market in 2022, with forecasts beginning to emerge on the back of blowout issuance this year.
Barclays on Nov. 12 announced that it expects both U.S. and European CLO issuance to slow from the record pace in 2021 but to remain higher than in previous years.
Supported by a new issue arbitrage that remains attractive, a record number of open warehouses and attractive relative value, analysts at the bank currently forecast U.S. broadly syndicated loan CLO issuance of $135 billion-$145 billion in 2022 ($95 billion-$105 billion net supply based on expected amortization of deals past their reinvestment period).
This would represent an approximately 5% decline versus projected 2021 issuance of about $150 billion, according to the research note.
"It is difficult to predict another year of such stability in new issue excess spreads, which represents a downside risk to our new issue forecast. If elevated primary supply or macro risks begin to weigh on spreads, the new issue arb could decline and pressure future issuance" the note said. Nevertheless, analysts highlighted that well over 200 warehouses are currently open — representing $100 billion in issuance — suggesting strong issuance in the first quarter of next year.
On the refinancing and reset front, Barclays forecasts activity to "fall significantly" in the U.S. to $70 billion-$80 billion in 2022, from over $200 billion in 2021, given some risks to the market and continued strong primary supply weighing on spreads.
Uncertainty about the Libor/Sofr transition is one area that the bank expects will likely cause U.S. CLO issuance to slow in the first quarter as market participants get accustomed to quoting deals based on Sofr and accounting for asset and liability mismatches, but this is not expected to cause a large decline in supply over the course of the year, the note said.
However, analysts note that the European market could experience increased activity relative to the U.S. market at the beginning of the year while the U.S. market works through the transition.
In Europe, the bank forecasts €30 billion-€35 billion of new CLO issuance in 2022 (€20 billion-€25 billion net supply based on expected amortization of deals past their reinvestment period), supported by robust supply and demand technicals.
On the refinancing and reset front, Barclays again expects activity to decline significantly from the 2021 record levels, at €10 billion-€15 billion. "Because of the new issuance and reset activity that has already occurred, a smaller portion of the market should be eligible for refinancing at the start of 2022, as many deals remain in non-call periods. While 78% of the index will be out of non-call periods by the end of the year, spreads would need to stay compressed into the back half of the year for refi/reset activity to be elevated next year," said the bank's analysts.