ABS & CLO market highlights from 1Q 2024
ABS market
- 2024 is off to a roaring start in the ABS space, with quarterly issuance hitting a record $95.1 billion in 1Q 2024 amid a broad tightening of spreads. While some of this volume reflects lingering supply after a late 2023 issuance slowdown, demand is robust to start the year enabling issuers across a broad spectrum of asset classes to tap the market before potential late-year volatility.
- Consumer ABS pools continue to see performance challenges heading into the new year as seasonal factors, weaker performance from 2022 vintage loans, and consumer struggles with high costs weigh on credit. In the auto space, repossession challenges and declining vehicle values have weighed on recoveries as well. Lenders broadly tightened underwriting in 2023, which, in tandem with the oncoming tax return season, may support stronger performance in the months and year ahead.
- Secondary spreads stand near levels last seen in summer 2023 after tightening through the winter as expectations continue to shift towards a soft landing and the potential for rate cuts later this year bears opportunity. Election-related volatility and a lack of clarity on the number of rate cuts for the rest of the year serve as potential headwinds, though the short-term outlook for spreads is largely range-bound.
CLO market
- CLO issuance in the 1st quarter was robust, with new issues, refis and resets all hitting their highest quarterly totals since 4Q 2021 on the back of strong investor demand and leftover 2023 loan supply. Middle market and private credit demand continues to hold strong, with $9.6 billion of middle market/private credit CLO issuance comprising 20% of total new issue volume this quarter.
- Strong demand has benefited managers, as a more optimistic credit outlook helped drive down funding costs in both BSL and middle market/private credit CLOs in the 1st quarter. Coupons contracted across the capital stack, with middle market/private credit CLOs generally seeing greater contraction.
- After tightening credit in 2023, banks have re-emerged in the leveraged lending space in 2024, taking back some lost market share as issuers shifted to the BSL space to refinance debt previously financed in the private credit space to save on funding costs.