CLOs are Done Betting on Post-Covid Reflation, Barclays Says

(Bloomberg) -- The biggest buyers of leveraged loans are through with betting on post-pandemic reflation and reopening, according to strategists at Barclays Plc. 

Fund managers that buy loans and bundle them into collateralized loan obligations have been cutting their exposure to debt that benefits from reflation, such as hotels and casinos. They’ve reduced their holdings as prices on those loans have largely recovered, reaching about 90% of their pre-pandemic relative value, according to strategists led by Brad Rogoff at Barclays. 

“The ‘re-opening trade’ has run its course,” the strategists wrote. “First, Covid risks remain and will continue to weigh on earnings for these sectors, and the pandemic has led to a shift in consumer habits that will likely persist long past the Covid era.”

While the lighter Covid exposure hurt CLO performance during the rally early this year, the current underweight could be a benefit, according to Barclays. Many of these loans have little room to rise further, the strategists wrote.  

The average credit ratings of loans in CLOs has been improving, as debt graders have been lifting scores and fund managers have focused on higher-quality credits, the Barclays strategists said. Loans rated CCC, one of the lowest ratings, accounted for about 10.4% of CLOs holdings in the middle of last year, and now are closer to 5.4%. 

U.S.

NatWest Markets Plc is in the high-grade bond market. Another issuer elected to push back its bond sale to next week, as the Chinese government’s crackdown on cryptocurrencies and the debt crisis at China Evergrande Group continue to keep investors on edge. 

• Spirit AeroSystems, a manufacturer of products including fuselages and wing components, is the only company slated to hold a leveraged loan lender call Friday. It’s looking to cut borrowing costs on debt sold last year during the pandemic
• The U.S. junk bond market has seen its busiest week since mid-August with borrowers poised to sell about $14 billion as yields continue hover far below 4%
• Coinbase Global Inc.’s debut junk-bond sale fell to fresh lows Friday after the Chinese government banned all crypto transactions and vowed to stop illegal crypto mining
• Redwood Capital Management is preparing to start a business development company as the firm seeks to expand its reach in the hot direct-lending market
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

Europe

Europe’s primary market sales may be poised to top 40 billion euros ($46.8 billion) for a third straight week, as French telco Altice France readies a dual-currency high-yield offering.

• The HY issuer is expected to price a $3 billion equivalent transaction split across euros and dollars as it seeks to refinance existing dollar notes and finance recent acquisitions
  • Macquarie Group sold a sterling-denominated deal
• These will add to a weekly tally that’s already exceeded 38 billion euros, in line with 87.5% of respondents to a Bloomberg survey

Asia

Holders of China Evergrande Group’s dollar bonds have been left on edge after the firm gave no signs of meeting a Thursday deadline for an $83.5 million coupon payment; China’s housing regulator has stepped up oversight of Evergrande’s bank accounts to ensure funds are used to complete housing projects and not diverted to pay creditors, another sign that homeowners come first on Beijing’s priority list for managing the company’s crisis.

• New dollar-bond sales in Asia excluding Japan plunged due to increased uncertainties about the fate of Evergrande and its impact on credit markets.
• Primary deals slid to $1.8 billion from $18 billion in the previous week, according to Bloomberg-compiled data; China Construction Bank was the biggest issuer with a $700 million offering
• Concerns over contagion from Evergrande pushed spreads of Chinese high-yield dollar notes to their highest in a decade earlier this week

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