Although the leveraged finance markets have shaken off the jitters from the end of 2018, the aftershocks are still apparent, as loan issuance has been lackluster this year. This has been compounded for CLO managers by the fact that the loans in the market are either not suitable to purchase or offer too low of a spread to make the arbitrage between their assets and liabilities economical for a new deal.
Institutional leveraged loan volume so far this year is $93.2 billion, according to LCD data, down 42% from this time last year.
Still, LBO activity has managed to keep pace, with $34.3 billion in loans tied to financing buyouts issued in the year to date, versus the $30.6 billion through the end of last April.

Few signs of meaningful pickup
This drought of loans is not expected to change anytime soon, since no notable large transactions or big pickup in number of deals is expected.
Part of the issue stems from the fact that many of the investment banks in December stopped pitching for new buyouts, focusing instead on clearing out the backlog of loans and bonds that had accumulated on their books with the primary markets shut down.
Even with banks starting to pitch potential suitors again, that process could still be expected to take around six months.
Expect more add-ons, refis, and dividend recaps in the meantime
Many CLO managers do not have the patience to wait for deals to get completed. As previously reported there are estimated to be over 120 warehouses currently open, many of which are still thinly ramped.
As a result, opportunistic activity is expected to pick up in lieu of new-money deals, with more add-ons and refinancings coming to market.
In some cases, loan investors have even approached private equity sponsors asking if they were interested in conducting a dividend recapitalization, sources have said.
Not enough good loans to fill CLOs
CLO managers are finding that even the loans that have come to market either offer too little spread or, for the ones that offer more spread, come with additional risk.
“There just aren’t enough loans in the primary that you can buy right now to fill your warehouse,” one CLO manager said.
Now CLO managers are debating whether to potentially reach for additional spread and/or lower credit quality to make the arbitrage between loans and liabilities viable. While a certain camp of managers are wary of the additional risks being taken to receive a higher spread, others argue that those spread levels are still wider than where they would otherwise have been a year earlier.
The excess demand compared to the lack of supply for loans has already helped lower costs for a number of borrowers, as the ratio of loans issued in April flexing tighter was at 4.8:1, with an average savings of 25 bps, at one point reaching as high as 43 bps in January.
The weighted average spread of a loan portfolio in a new CLO can range anywhere from L+320 to L+370, and the chart below shows the distribution by rating and spread so far this year available to CLO managers.

Loans with a spread under L+300 bps are viewed to be too low for a CLO, while ones issued above L+400–450 are thought to have some sort of challenging credit story that leads it to price at the higher level in order to compensate the investor for taking greater risk.
Source：LCD