Blog
Octus on Credit: New firms rush to establish CLO platforms as market adjusts to lower rates
Hugh Minch, Editor - CLOs
How CLO activity correlates with interest rates remains a topic with limited clarity, but with the Federal Reserve cutting rates by 25 bps last week, market participants are adjusting their investment strategies as the higher-for-longer era comes to a close.
Lower rates should prove a net benefit to CLO equity returns, as a stronger M&A and LBO pipeline brings new loan paper to market while improved fundamentals help CLO managers boost their interest coverage. However, lower rates will likely dampen demand for floating rate products, potentially reversing fund flows in both loan mutual funds and CLO ETFs.
Octus has reported that investors are already seeing the forward-looking CLO pipeline thin, though this trend stems more from tightening equity arbitrage amid a historically tight loan market than from rate dynamics. Activity remains strong, particularly in refinancing and reset transactions, with Japanese investor demand continuing to drive the primary market.
Despite these complexities, new firms continue entering the space. 26North, Millennium Management, Squarepoint Capital and Triton Partners are the latest firms to signal their arrival.
For live discussion about these market dynamics, join us at the Octus London Credit Forum on October 23.
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