‘The Party Is Over’ – European CLO Managers Test Primary Demand as Secondary Stabilizes

Several European CLO managers are gauging investor demand for primary issuance after last week’s volatility brought the market to a halt.

Pemberton is testing appetite for the senior tranche of its Indigo CLO III via Goldman Sachs at Euribor+140 bps, according to sources. The manager is looking to price the deal at the end of the month.

At least two other managers are also rumored to be in talks with investors about transactions.

A number of deals were pulled or paused last week due to the market turmoil caused by uncertainty around U.S. trade tariffs.

Bankers are still hesitant to predict where spreads are ultimately going to land.

“Some people are saying it will be the mid-130s,” said a syndicate banker, “others say that 150 bps seems the right level, in line with secondary markets. But if I were to call someone giving that opinion and ask if I could hit them at that level, the answer would be no.”

The weighted average cost of capital could be 30-40 bps higher than before the tariff announcements, the banker estimated.

In periods of volatility, the secondary CLO market has to calm down before prices for primary issuance can be determined, said another syndicate banker. “If there is more attractive paper in secondary, investors will tend to look there first. Even if the [discount margins] are similar to where primary would be, secondary can be more attractive if you can buy at a discount.”

In the secondary market, spreads have begun to stabilize since the end of last week, according to market participants.

A CLO trader told Octus that triple-As are clearing at 125-150 bps, double-As at 170-220 bps, single-As at 240-290 bps, triple-Bs in the low 300s to mid-400s. Yesterday, April 14, some shorter-dated triple-Bs traded at 325-350 bps.

Volumes of CLO bonds up for auction, or BWICs, were among the highest since late 2022 last week. According to Solve data, investors offered €781 million of paper via BWICs.

There were no CLO equity BWICs, although several equity investors said they picked up small amounts in bilateral trades.

Both hedge funds and asset managers, the so-called real money, are buying into offers across the capital structure, according to the trader.

“It feels like we’ve seen the worst of it, and what we’re left with is a market that’s got more opportunity in terms of wider spreads,” sources said. “In February, it was hard to find anything trading below par. Now you can buy triple-As at 99 or a low 99 handle again.”

Several investors said the chance to pick up real bargains in the secondary market is already past.

“We weren’t that successful, to be honest,” said a mezzanine investor. “Triple-Bs, which were around 400 or high 300s on Friday, started to trade around the mid-300s with a bit of convexity, which doesn’t look super-interesting.”

Another investor with a triple-A focus declared that “the party is over.”