3Q 2022 ABS & CLO market key takeaways

ABS issuance in the third quarter slowed to its lowest level since 4Q 2020, as headwinds including rate hikes, inflation, deteriorating performance and global financial markets volatility decreased issuance across most flow asset classes back to moderate pre-pandemic levels. Issuance stood at $57.6 billion in 3Q 2022, down 25% from both 2Q 2022 and 3Q 2021. However, on the heels of a strong first half of 2022, year-to-date new issuance of $204.6 billion is down only 5% compared to that of 2021.

Secondary spreads retreated from second quarter peaks, though they saw widening near the end of the quarter as market volatility and an increasingly hawkish Fed rate policy weighed on investor sentiment. This bearish sentiment, along with Fed rate hikes, increased primary yields, which are expected to remain elevated through the fourth quarter.

The CLO market also felt the impact of broad global financial market volatility, rising rates and investor concerns over the impact that macroeconomic risks may have on the future performance of underlying leveraged loans. These conditions led 3Q 2022 new issuance to fall to $33.1 billion, a 17.8% decline from 2Q 2022 and a 29.7% decline from the same quarter last year. While quarterly new issuance is down from last year’s record-breaking levels, year-to-date volume of $104.0 billion still represents the second highest CLO issuance volume recorded through the first three quarters of a year. As such, total year issuance will likely remain aligned with, or even ahead of, pre-pandemic annual levels of $115-130 billion.

Wider spreads, however, have kept some managers on the sidelines and most deals out of the money for repricing (there were no resets or refis in 3Q 2022), with AAA coupons widening from SOFR+163 bps in 2Q 2022 to SOFR+211 bps in 3Q 2022.

Although overall CLO new issuance fell, middle market issuance came out slightly ahead of last quarter. Seven new issue middle market CLOs priced in the third quarter for a total of $2.9 billion, up from six for $2.8 billion last quarter (but well behind 3Q 2021’s historically high total of $5.3 billion). Middle market CLO spreads continue to rise, consistent with the broader fixed income market.

The Financial Institutions Group ended the quarter with roughly $15 billion in commitments to 150 clients. In addition, thus far in 2022, Capital One Securities helped place 17 transactions totaling $13 billion in asset classes, including CRE CLOs, CMBS, credit card, prime and subprime auto loan, middle market CLOs, small business and unsecured consumer.

While a strong first half of 2022 will likely enable the U.S. ABS and CLO markets to end the year with an overall healthy level of issuance, the third quarter showed that the structured finance markets are not immune to global financial market volatility and rising macroeconomic uncertainty under an undeterred hawkish Fed to rein in inflation. These risks have only further impacted issuance over the past few weeks as cracks in even the perceived safest sectors have faced liquidity and pricing dislocations. Nonetheless, the structured finance market remains active. We look forward to working with our clients to successfully navigate these choppy waters—please reach out to start exploring ways we can help you meet your financing objectives.