In an exclusive interview, LFI spoke with Himani Trivedi, Nuveen‘s head of structured credit, on increased activity in new issues, refinancings, and resets in the CLO market this year. She said that improved financing costs and capital market openness have benefited leveraged finance due to reduced inflation and rate cuts. However, low new loan issuance has created a technical challenge, leading to a bid for quality loans. Nuveen expects robust CLO issuance next year, with tightening spreads on Triple A tranches benefiting CLO equity arbitrage. The changing administration’s policies could create volatility and opportunities, impacting earnings and inflation. Lower default forecasts are positive for CLO equity investors, and high net worth and institutional investors are increasingly interested in CLOs through various investment vehicles.
LFI: What’s top of mind for you regarding CLO activity this year?
Nuveen: This year, we’ve seen a lot of activity in both new issues and refi and resets. The financing cost and the openness in the capital markets have improved as the probability of an economic soft landing has risen with reduced inflation and the start of rate cuts. This has been beneficial for leveraged finance, as the decline in rates has provided companies with relief and the constructive economic outlook is boding positively for defaults. However, new loan issuance has been muted, causing a technical challenge where new CLOs are forming, but there’s no new supply on the loan side. This has led to a bid for good quality loans, with some older CLOs being called and retail investors moving to floating from fixed assets.
LFI: What are your expectations for the CLO market going into next year?
Nuveen: We expect robust issuance. The asset class has proven itself through multiple cycles, and more investors are acknowledging its value. We anticipate that the spreads on Triple A’s will continue to tighten, which will continue to be accretive for the CLO equity arbitrage. New investors, including those from Japan, find CLOs interesting at current levels. The ETF explosion in the CLO arena and comparisons with corporate credit also support this outlook.
LFI: Can you elaborate on the 2025 outlook, especially with the changing administration?
Nuveen: The change in administration brings new perspectives on industries, regulations and government spending. This creates volatility and opportunities. Tax cuts and tariffs are significant items on the agenda, and their impact is still evolving. We are focused on understanding how these changes might affect earnings. Additionally, the potential for reinflation due to tax cuts and foreign policy changes could influence inflation and interest rates, which are crucial for our 2025 outlook.
LFI: Fitch recently lowered its forecast for defaults. How does this impact CLO equity investors?
Nuveen: Lower defaults are positive for CLO equity investors, as equity is the first to absorb losses. CLO equity is set up to perform well in environments with tight debt financing costs and low defaults. The economic outlook is robust, and companies are working through capital markets activity. This has improved the quality of assets, and we expect this trend to continue, benefiting CLO equity investors.
LFI: What are your thoughts on spreads for large liquid manager BSL Triple A new issues?
Nuveen: We predicted spreads in the 130s to 140s range two years ago, and we are currently at 130. Investor demand, including the booming CLO ETF market, continues to be robust for investment-grade CLO tranches given the attractive profile versus corporate and securitized credit. With demand looking to remain high, we expect Triple A spreads to tighten further, potentially reaching the 120s next year.
LFI: How are high net worth investors and institutional investors approaching CLO investments?
Nuveen: High net worth investors typically invest in CLOs through funds and platforms. Recently, more liquid credit options like ETFs have become available, providing easier access. Institutional investors prefer dedicated dollars and customized portfolios, partnering with managers for long-term investments. They focus on the manager’s track record and philosophy.
LFI: What kind of returns can CLO equity investors expect going forward?
Nuveen: CLO equity typically offers returns in the mid- to high-teens over a period of six to seven years. It’s a spread arbitrage product, and the delta between assets and liabilities is crucial. CLO equity provides a near-immediate quarterly distribution, making it attractive compared to private equity, which has a back-ended return profile. Investors appreciate the consistent cash flow and the diversification within the private equity ecosystem.
David Graubard
david.graubard@levfininsights.com
+1 646 361 6095
