4Q 2022 ABS & CLO market key takeaways
ABS market
The ABS market remained robust in 2022, achieving only a modest dip in issuance from the all-time high seen in 2021 as issuance slowed in the second half of the year amid rising market uncertainty related to rate hikes, inflation, rising credit concerns and overall global financial markets volatility. Issuance finished the year at $258.0 billion, coming in 9.1% below 2021 but marking the second highest year of issuance in the asset class’s history.
Auto loan credit metrics have normalized to pre-pandemic levels in 2022 after two years of pandemic-influenced stimulus, extensions and healthy consumer credit fundamentals supported strong performance. Credit performance is expected to continue to weaken in early 2023 due to seasonal factors as well as vehicle prices continuing to fall from all-time highs.
While secondary ABS spreads started the year near all-time lows, hawkish Fed policy as well as concerns over the consumer and broader economy led spreads in ABS and other spread products to widen to post-crisis highs (excluding the early pandemic), before slightly moderating at year-end. While remaining tight to start the year, spreads are expected to widen in early 2023.
CLO market
Broad financial markets volatility and investor concerns over the health of corporate debt led to a slower year in the new issue space after a record-setting 2021, with the year-end total of $129.3 billion of new issuance coming in 31.2% below 2021 levels. Similar to the ABS Market, 2022’s volume still came in as the second largest year of new issuance in the CLO 2.0/3.0 era. Refinancings and resets, however, saw their lowest volume since at least 2016, with just one reset in the second half of the year.
Defaults stood historically low through 2022, with S&P/LSTA’s Leveraged Loan Default Index ending the year at 0.72% versus 0.29% at YE 2021. While defaults are low, the Distressed Ratio (the share of loans priced below 80) continues to show signs of stress in the market, and the downgrade to upgrade ratio stood at elevated rates at the end of 2022, signs of potential future stress.
A total of 26 new issue middle market CLOs were priced in 2022 for a total of $12.0 billion, compared to 41 new issue transactions totaling $22.1 billion in 2021. Consistent with movements seen in the BSL CLO space, new issue middle market CLOs saw funding costs steadily climb, with AAA coupons in the fourth quarter averaging 270 bps compared to 153 bps in the fourth quarter of 2021.