Key 4Q 2023 takeaways from the ABS & CLO market
ABS market
Despite turbulence over the year from the regional banking crisis and uncertain macroeconomic factors, ABS issuance ended 2023 just above 2022’s levels, bolstered by robust issuance in the prime auto loan and lease space, though other benchmark ABS asset classes saw declines in issuance.
Consumer ABS performance deteriorated over 2023, both due to consumers struggling with high payments/inflation and looser underwriting in 2021-2022 vintages. Auto losses and delinquencies are at or exceeding pre-pandemic levels (in some cases ahead of Global Financial Crisis levels) and unsecured consumer losses and delinquencies are in their high range of their (limited) history. Lenders broadly tightened underwriting in 2023, giving hope for new vintages to see stronger performance, though performance for outstanding deals may continue to deteriorate in 2024 largely depending on the state of the job market.
Secondary ABS spreads saw some twists and turns through 2023, including the regional banking crisis and an influx of supply in the 3rd quarter, but muted 4th quarter primary supply and sustained demand, along with strong macroeconomic news, brought spreads tighter to close the year. Benchmark rates also showed volawtility through 2023, though funding costs remained relatively range-bound compared to volatility seen in 2022.
CLO market
Light loan supply and elevated benchmark spreads kept total 2023 CLO issuance below 2022’s levels. In 2023, new issuance was down 11.0% from 2022 levels, but interest in the middle market/private credit space skyrocketed. Middle market/private credit CLO issuance of $26.7 billion more than doubled 2022’s total of $12.0 billion to set a new record, representing a 23% share of total new issuance compared to 9%-13% between 2016 and 2022.
Capital costs for BSL CLOs are at their tightest since mid-2022 as macroeconomic headlines grew more constructive over the year and expectations of a soft landing over a recession grew among market participants. Funding costs in middle market/private credit CLOs generally tightened over the course of the year, fueled by investor demand for middle market/private credit and floating-rate products.
Leveraged loan credit metrics weakened in 2023 after a benign pandemic era, with the Morningstar/LSTA leveraged loan index’s 12-month default rate ending the year at 1.53% compared to 0.72% at the end of 2022. Other credit metrics were mixed to end the year, with the percentage of distressed leveraged loans declining, but downgrades continuing to outpace upgrades.