2Q 2023 ABS & CLO market key takeaways

ABS issuance in the second quarter continued to rally despite macroeconomic fears and volatility stemming from debt ceiling negotiations and the wake of the regional banking crisis. Auto, credit card and student loan ABS issuance increased over the quarter (with auto hitting a new quarterly high), while equipment and “other” ABS issuance modestly declined.

Consumer ABS performance benefited from tax season dips in losses and delinquencies, though May performance brought early signs of weakness in the form of rising delinquencies. In auto, losses are still within range of pre-pandemic levels while unsecured delinquencies and losses are on the high range of their (limited) history.

While secondary ABS spreads remain elevated from lows seen in the early months of 2023, they have fallen from the spikes seen in the wake of the March banking crisis. Additionally, while funding costs for issuers remain elevated, the pace of increase has slowed in the unsecured consumer space and fluctuated in the subprime auto space.

Light new loan supply, a changing investor base and elevated cost of funds led issuers to temper CLO issuance in 2Q 2023, falling back in line with 4Q 2022. While overall CLO new issuance has declined, interest in the private credit space has driven middle market CLO issuance to new highs, with $11.4 billion issued in the first half of 2023, representing 21% of total new issuance compared to 7-14% in 1H 2016-2022.

Leveraged loan defaults continue to rise from historic 2022 lows, with the Morningstar/LSTA Leveraged Loan Index’s 12-month default rate ticking up to 1.7% in June compared to 1.3% last quarter. Additionally, the share of distressed price leveraged loans on the market stands at elevated levels, and the ratio of loan downgrades to upgrades stands at elevated levels after a pandemic-era lull.

Leveraged loan volume in both the BSL and middle market space remains tight as M&A activity and other new deal flow slows, while refinancings, amend-and-extends and add-ons drove recent activity. Refinitiv notes that the M&A market continues to struggle to gain traction amid a disconnect between buyers and sellers around valuations and higher borrowing costs, inhibiting new money issuance.