Home > Resources > Video Library > Identifying Opportunity in Bank Loan and CLO Markets
Economic and Market Commentary

Identifying Opportunity in Bank Loan and CLO Markets

Bank loan and CLO markets struggled in the volatility of Q4 2018, but PIMCO sees three attractive opportunities on the horizon. Alternative Strategist, Nelson Yuan discusses where we are identifying value and how a U.S. recession might affect the CLO market.

More from this section

Read Transcript

Fourth quarter market volatility in the bank loan market and the CLO market were very pronounced, mostly driven by the equity market volatility and also lower expected earnings growth in the United States.

That volatility caused bank loan prices to have their second worst performance in the last nine years. The S&P/LSTA Leverage Loan Index dropped two and a half percent during December, but early signs in January show a modest recovery in prices which may continue into the first quarter.

CLO markets, on the other hand, saw very little issuance in the course of December, mostly driven by hopes by CLO managers that the markets will improve in the first quarter of 2019. In the CLO secondary markets, both debt and equity prices significantly dropped. And in fact, on CLO equity tranches we saw bid-ask spreads widen to as much as ten points as the market became highly illiquid during the volatility of December.

PIMCO sees opportunities in this CLO market, primarily by being patient but nimble in this marketplace. In particular, we're focused on providing liquidity into a currently very illiquid market.

In order to do that, we need the relationships, the expertise, the speed and capital to take advantage of those opportunities.

Three areas that we find interesting are first, in the secondary market, providing liquidity to force sellers in the marketplace. We haven't really seen them come into the market yet in December, but we expect that as this volatility continues, they will likely become much stronger for sellers.

Second is in doing print and sprint CLO deals where we can currently issue the CLO debt tranches, while also buying at discounted prices loans in the secondary market.

And finally, we think that there are opportunities in buying hung warehouses off of the banks. These are deals where the bank was looking to price the debt tranches but was unable to and therefore looking to sell them to us.

The potential risks for a US recession will have a minimal impact on CLOs. PIMCO's view is that in 2019 the risk of a recession is very minimal. However, in the three-to-five-year horizon we think that there is much more elevated risk of a recession. However, that recession we believe will likely be more shallow but longer in duration compared to the 2008/2009 crisis, mostly because of number one, there being less over-leverage in the market, so therefore less de-leveraging that needs to take place in the market correction; and second, because the policy tools that are available to the central banks are more limited today than they were in 2008 and '09.

From the investor surveys that we've seen in the bank loan market, the expectation for 2019 default rates in bank loans is around 2.1%, which is a little bit higher than the 2018 default rate of 1.6%, but still lower than the 3.1% historical average for default rates in the bank loan market. Given PIMCO's views of a shallower but longer recession, we believe that CLOs are well positioned to still be very profitable for investors during the course of the next three-to-five years.

Filters: Reset All

Filters

Close Filters Dropdown

  • Tags

    Reset

    Close

  • Category

    Reset

    Bond by Bond
    Careers
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
    Viewpoints
    Education
    Close

  • Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Multimedia Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Foundation
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • E
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • Q
  • R
  • S
  • T
  • W
  • Y
  • Z
Clear
Berdibek Ahmedov
Product Strategist, Equities and Multi-Asset
Joshua Anderson
Portfolio Manager, Income and Asset-Backed Securities
Del Anderson
Credit Analyst
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
Allison Boxer
Economist
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Multi-Asset Strategies
Esteban Burbano
Fixed Income Strategist
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
U.S. Public Policy
Yishan Cao
Credit Research Analyst
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Richard Clarida
Global Economic Advisor
Mathieu Clavel
Portfolio Manager, Alternative Credit
Tony Crescenzi
Portfolio Manager, Market Strategist
Josh Davis
Global Head of Risk Management
Pramol Dhawan
Portfolio Manager
Devin Ekberg
Senior Consultant, Advisor Education
David Fisher
Co-Head of Strategic Accounts, U.S. Global Wealth Management
David Forgash
Portfolio Manager
Preeyam Gandhi
Strategist
Max Gelb
Product Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Gregory Hall
Head of U.S. Global Wealth Management
Mary Hoppe
Account Manager
Ray Huang
Portfolio Manager, Real Estate
Jingjing Huang
Strategist
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Sean Klein
Head of Client Business Strategy – Client Solutions and Analytics
Kristofer Kraus
Portfolio Manager
Raji O. Manasseh
Equity Strategist
Samuel Mary
ESG Research Analyst
Kyle McCarthy
Alternative Credit Strategist
Mohit Mittal
Portfolio Manager, Multi-Sector
Alfred T. Murata
Portfolio Manager, Mortgage Credit
John Murray
Portfolio Manager, Global Private Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Rick Pagnani
Head of Insurance-Linked Securities
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Gavin Power
Chief of Sustainable Development and International Affairs
William Quinones
Product Strategist
Lupin Rahman
Portfolio Manager
Graham A. Rennison
Quantitative Portfolio Manager
Libby Rodney
Steve A. Rodosky
Portfolio Manager
Emmanuel Roman
Chief Executive Officer
Steve Sapra
Senior Advisor
Jerome M. Schneider
Portfolio Manager
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Candice Stack
Head of Client Management, Americas
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Cathy Stahl
Global Head of Marketing
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
John Studzinski
Vice Chairman
Geraldine Sundstrom
Portfolio Manager, Asset Allocation, EMEA
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
Mark Thomas
Account Manager, Global Wealth Management
Jessica K. Tom
Senior Credit Analyst
François Trausch
CEO and CIO of PIMCO Prime Real Estate
Jerry Tsai
Client Solutions and Analytics
Matt Tuten
Portfolio Manager
Megan Walters
PIMCO Prime Real Estate
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Paul-James White
Portfolio Manager
Tiffany Wilding
Economist
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Jerry Woytash
Portfolio Manager, Short-Term Desk
Nelson Yuan
Kirill Zavodov
Portfolio Manager
Mike Cudzil
Portfolio Manager
PIMCO
Seray Incoglu
Portfolio Manager, Commercial Real Estate
Ben Bernanke
Chair, Global Advisory Board
Marcio Bogoricin
Head of Hong Kong and Singapore Global Wealth Management
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Sustainable Development Goals at PIMCO
Forecast Favors Fixed Income
Positioning Portfolios for 2024
Higher Yields Today Create Opportunity
Q4 2023 Update from the Asia Trade Floor
Specialty Finance: Seize Today’s Compelling Entry Point

Load more results Load {{cCtrl.fetchResults}} more results