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Bemoaning the quality and volume of loan supply has become almost second nature for loan portfolio managers. But there is a sense that this time, there really is a dearth of suitable assets for CLO managers to pick from.

“We’re in danger of being the boy who cried wolf, but there’s no doubt that there is a build up of pressure in the loan market,” said one CLO portfolio manager.

Too much cash chasing too few deals. Again.

GoldenTree went as far as returning cash to some investors from a 2020-vintage CLO after determining that over 20 days, it was unable to identify appropriate assets to invest in.

There are caveats to this. GoldenTree Loan Management EUR CLO 4 is out of reinvestment, so the pressure to put money to work is lower than for a reinvesting CLO. Furthermore, later-life CLOs such as this one find it increasingly challenging to source loans that meet tightening reinvestment criteria as the clock continues to tick.

Still, this feels like it's symptomatic of pressure building in the loan and CLO ecosystem.

But for every GoldenTree, there are potentially many more managers thinking the same, but still putting money to work — feeding into a powerful technical across high yield and leveraged loans.

As a credit strategist speaking with 9fin put it: “What is the technical? It’s a very simple thing — there are more people who want to lend money than who want to borrow money.” A second CLO portfolio manager concurred, pointing out that there are around 70 European CLO managers with half a dozen or so newcomers expected this year.

The market is now increasingly governed by a different set of forces than in prior cycles, with technicals overpowering everything else, as we reported on 30 September.

But as mentioned in 9fin’s recent 9Questions with Bhavin Patel, chief investment officer at Redding Ridge: “Recent credit mistakes you saw in the market are a reminder that 'technical strength' often masks fundamental erosion.”

Here, we’ll outline LevFin technicals across loans and bonds — highlighting CLO creation, coupon reinvestment, and new money dynamics.

Well, technically…

Most credit analysts, when asked to think about the drivers of credit spreads, generally lean on three concepts:

1. The credit quality of the issuer
2. Risk-adjusted returns and relative value versus peers
3. Market technicals, such as liquidity and fund flows