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ABS East — Going out on a high, CLO lows, the kids aren’t alright
Sasha Padbidri
•4 min read
If you were at the ABS East conference in Miami this week, there’s a good chance you dropped in on packed parties at venues like LIV nightclub and Soho House — a clear sign that the industry has moved on from the Covid-cautious vibes of last year’s much smaller event.
As usual, Monday night’s event at LIV was hosted by Credit Suisse’s securitized products group, so it may have been a kind of last hurrah.
The group still does very good business, so despite the troubles of its parent it is a hot commodity. It will live on in some shape or form, but there’s a strong chance that next year’s celebrations will have different branding.
LIVin' it up (photo by 9fin)
What exactly that branding will be is still unclear. Mizuho, Apollo, Centerbridge, Pimco and Sixth Street are all reportedly in contention. Place your bets!
CLO lows
The vibes were a little less jubilant among the conference’s sizeable CLO contingent.
Many were clear to point out that while last year represented a clear high-water mark for CLO volumes, this year has also been robust by historical standards — but issuance has been stop-and-start, and the outlook for loans has soured materially.
There may be bargains on offer in secondary, but credit quality is declining and the primary market is going through a rough patch. Consequently, lenders may have to open their minds to non-traditional refinancing methods.
“Lenders should be responsive and open to negotiations,” said Adrienne Dale Burns, a managing director at Onex Credit, during a CLO manager panel on Monday.
That’s not always going to look pretty. Lower-rated borrowers comprise a greater proportion of the overall loan market than they used to; many of those companies are PE-backed and have loose loan documentation that could put lenders at a disadvantage, panelists warned.
On that note, while these discussions were happening in Miami, a group of lenders was busy pushing back on Vericast’s exchange and amendment proposal. Check out our coverage of that situation — it may be instructive for other deals in the near future.
Despite these headwinds, managers and investors were pretty confident that even lower-rated CLO tranches are likely to weather the impact of downgrades and defaults.
“The cushions in triple-Cs are pretty healthy and can withstand higher downgrades in the near term,” said Pablo Rios, a direct at Vibrant Capital Partners. “Less than a percent are failing right now based on our data. If defaults go to 5%, CLO equity can withstand that.”
It’s the children who are wrong
When it comes to consumer credit, there are also worrying signs of an uptick in defaults. As usual, the younger generations are to blame.
On a panel discussing macro risks, the audience was treated to new data from Silvio Tavares, CEO of VantageScore (the discussion was moderated by 9fin’s own Will Caiger-Smith — if you’re curious to hear more, there’s a recording).
The data showed that while credit scores remain strong, consumers are adding leverage, and delinquencies among Millennial and Gen-Z borrowers are rising faster than their older counterparts.
(via VantageScore)
“We’re starting to see a bifurcation,” said Tavares. “High-end customers are doing well, but Gen-Z and Millennial consumers are not performing as well, because wage gains have not kept up with inflation.”
Given that Millennials have been blamed for killing everything from processed cheese to golf, it’s nice that Gen-Z is now old enough to share this burden.
And it doesn’t stop there. Apparently, the same demographic is also to blame for the difficulties banks are facing when seeking to attract new talent.
“Millennials and Gen-Z don’t want to be in banking, they want to be in fintech or on Tiktok,” said Deirdre Harrington, senior managing director at Cantor Fitzgerald, during the Women in Securitization panel on Tuesday.
The WiS panel (photo by 9fin)
Fortunately, some progress has been made in improving diversity in the space. Approximately 30% of the panelists at ABS East this year were women – a far cry from several years ago, when the Women in Securitization panel featured four men and just one woman.
The 2022 conference grind is not over yet. Many attendees noted that they will either be heading to DealCatalyst’s private credit forum in New York next month, or Opal Group’s annual CLO summit in California, which takes place in December.
