We have consistently argued that, over the past four to five years, the CLO market has come of age and developed into a mature market. The global institutional buyer base has significantly deepened over that period, driven by a number of factors: Investors have increasingly become comfortable with the robustness of the structure through multiple periods of market volatility (most recently during 2020), any lingering misplaced associations with the poor performance of subprime mortgage CDOs during the global financial crisis have faded, and, most importantly, CLOs continue to consistently offer a significant yield premium over other corporate credit instruments for an equivalent credit rating. New interest from first-time CLO buyers has come, notably, from insurance companies and public and corporate pensions investing in the senior and junior mezzanine debt and the equity segments of the capital structure.
At $1 trillion, the CLO market has reached a size where investors can no longer ignore it as an asset class. Buoyed by record levels of new issuance in 2021, the global CLO market recently reached $1 trillion in size, split roughly between 80% U.S. and 20% European CLOs. Total gross issuance in the U.S. CLO market as of midyear was $203 billion, as compared to $144 billion for the same period in the prior record year of 2018. Net new issuance has already reached $75 billion year-to-date.1
At the same time, secondary liquidity continues to deepen. Daily trading volumes increased 65% in 2020 from the prior year. CLO mezzanine debt and equity volumes are up significantly again year-to-date.
Should investors be worried about this rapid growth? Fundamentally, the CLO market is simply a conduit for large institutional investors to lend to non-investment grade borrowers via investments in rated CLO debt, albeit with structural and rating advantages for CLO investors. As detailed in a recent blog by Steve Ruh, Co-Head of Non-Investment Grade Research, bottom-up analysis of the non-investment grade credit markets points to strong underlying fundamentals and a favorable outlook for 2022 and beyond.
Given the favorable fundamental outlook of underlying non-investment grade credit markets and the significant downside protection afforded by the CLO structure, we believe CLO investors across the capital structure can continue to see excess yields for the asset class, including relative to similarly rated corporate credit sectors.