CreditSights: CLO Q&A with Sculptor's Josh Eisenberger on BSL Triple As could tighten to 120s, rate cut impact, views on bond buckets and captive equity

Where do you expect new-issue Triple-As to be in 4-6 weeks?

Recent volatility has put a bit of a damper on the tightening in CLO Triple As. J.P. Morgan has even recently called for CLO Triple As to pull back to S+150 and possibly S+175-200 in the case of a hard landing. Our recent conversations have led us to believe that Triple A spreads can tighten from the recent benchmark prints of S+134, though we see some resistance getting into the low S+120s.

How could the expected rate cuts impact the BSL CLO market?

As CLO liabilities are largely floating rate, any rate cut that would likely drive a drop in SOFR would reduce the running yield on CLO liabilities. As SOFR has risen, we have seen a number of CLO ETFs looking to capitalize on the retail investors’ search for yield, and these might see some pressure should the floating component of CLO liabilities be reduced. This yield dynamic is, of course, not only limited to the retail investor base via traded ETFs, as there have certainly been a handful of CLO liability investors created or that have grown larger in the asset class just due to the absolute yield available (CLO Triple As current spot yield of about 7%).

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