The biggest U.S. banks are stepping back into the $1.3 trillion market for collateralized loan obligations after nearly two years of shying away from investing in the securities.
Citigroup Inc. has resumed buying CLOs, according to people with knowledge of the situation. JPMorgan Chase & Co. and Bank of America Corp. are also ramping up holdings of AAA rated tranches, the safest and largest slices of the structures that bundle leveraged loans into slices of varying risk and return, said the people, asking not to be named discussing private transactions.
An increase in deposits in recent months is prompting banks to seek out high-quality fixed-income assets to deploy money, market watchers say. The return of Wall Street buyers has pushed spreads well below year-end levels, jump-starting CLO creation and ginning up demand for loans. That could ultimately help leveraged finance desks better compete with private credit to finance buyouts.
“CLO liabilities have tightened,” said John Wright, global head of credit at Bain Capital Credit. “That begets CLO formation and that begets loan demand.”
Representatives for Citigroup and Bank of America declined to comment, while JPMorgan didn’t respond to a request seeking comment.
For years the global CLO market was dominated by Japan’s Norinchukin Bank, which at one point purchased nearly half of all AAA issuance. When the Japanese lender pulled back from CLO investing beginning around 2019 amid regulatory scrutiny, the largest U.S. banks stepped in.
Yet wary of new capital rules and spooked by the blowup of Silicon Valley Bank, they had backed away. New investors ranging from Middle East buyers to Greek banks helped fill the void, but AAA prices remained wide and putting together CLOs profitably was challenging.
“We’re hearing that the banks are more active. Why were banks on pause last year and not now?” said Brendan Beer, co-portfolio manager of Oaktree Capital Management’s structured credit strategy. “The banks have more money now than they did in mid-2023.”
U.S. banks’ securities holdings are on the upswing after tumbling from more than $5.8 trillion to a low of about $5 trillion late last year, according to a Bloomberg index of Federal Reserve data. The uptick coincides with an increase in deposits after they fell from a peak of about $18 trillion in the first part of 2022, according to a related index.
JPMorgan resumed buying CLO debt about a year ago but sporadically. BofA has also been investing here and there, and now intends to increase the amount.
In the U.S., Carlyle Group Inc. last week issued a new CLO with AAA debt yielding 1.53 percentage point over the benchmark rate—about 20 basis points tighter than on similar AAA debt it issued in November. Over in Europe, Fidelity and Sound Point Capital Management issued a new CLO with AAAs at 1.5 percentage point over the benchmark. Just last month, similar deals were pricing with spreads of around 1.7 percentage point.