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


Close Filters Dropdown
  • Tags


  • Category


    Bond by Bond
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
  • Order By


    Most Recent
() 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
  • B
  • C
  • D
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • R
  • S
  • W
  • Y
Andrew Balls
CIO Global Fixed Income
Marcio Bogoricin
Head of Global Wealth Management, Asia ex Japan
Allison Boxer
David L. Braun
Portfolio Manager
Jelle Brons
Portfolio Manager, Global and U.S. Investment Grade Credit
Erin Browne
Libby Cantrill
U.S. Public Policy
Yishan Cao
Credit Research Analyst
Kenneth Chambers
Fixed Income Strategist
Stephen Chang
Portfolio Manager, Asia
Richard Clarida
Global Economic Advisor
Tony Crescenzi
Portfolio Manager, Market Strategist
Harin de Silva
Portfolio Manager, Special Situations
Pramol Dhawan
Portfolio Manager
Matt Dorsten
Portfolio Manager, Quantitative Strategy
Anna Dragesic
Head of Global Credit Product Strategies
Jason Duko
Portfolio Manager
David Forgash
Portfolio Manager
Adam Gubner
Portfolio Manager, Distressed Debt
Jingjing Huang
Daniel H. Hyman
Portfolio Manager
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Jason Mandinach
Head of Alternative Credit and Private Strategies
Mohit Mittal
CIO Core Strategies
John Murray
Portfolio Manager, Global Private Real Estate
Roger Nieves
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Gavin Power
Chief of Sustainable Development and International Affairs
Lupin Rahman
Portfolio Manager
Graham A. Rennison
Quantitative Portfolio Manager
Steve A. Rodosky
Portfolio Manager
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
Kimberley Stafford
Global Head of Product Strategy; Responsible for Sustainability Oversight
Jason R. Steiner
Portfolio Manager, Private Lending and Opportunistic Strategies
Christian Stracke
President, Global Head of Credit Research
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Corporate Special Situations
Tiffany Wilding
Nelson Yuan
Mike Cudzil
Portfolio Manager
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Private Markets: Early Innings for Asset Based Lending
Yield Advantage: Key Takeaways from PIMCO's Secular Outlook (video)
The Yield Advantage in Global Markets
How Can Your Cash Work Harder?
Investment Strategies

How Can Your Cash Work Harder?(video)

How Can Your Cash Work Harder?

Investors hold cash for a variety of reasons, but having the bulk of cash in traditional instruments may not be the best option across all the reasons for holding cash. A liquidity tiering strategy can help investors gauge how much cash they actually need in their portfolios based on their goals and objectives -- and how much they should consider allocating to higher-returning short duration strategies.

Specialty Finance: An Expanding World of Opportunity
Gain an Active Edge in the Bond Market (video)

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