The $ 1.31.3 billion stock market contraction is bad news for the economy.

Oct 23
This crucial area of corporate financing has about 40% of issuers who have yet to price a new deal this year, which is a bad omen for Wall Street and the industry.

Investment bankers engaged in debt financing—profitable lending—had a rare occasion to celebrate for a brief period this month. Dealmakers found company valuations to be seductively low, the US Federal Reserve attempted to reverse punitive rate hikes, and loans were made.
Wall Street's hopes were dashed when it became clear that Federal Reserve Chairman Jay Powell was still not ready for a change, and funding plans were once again halted.

The CLO business, which grew during a period of low-interest rates by aggregating loans and marketing them as bonds, appears especially susceptible to a freeze.

According to Citigroup Inc., over 40% of securities issuers have yet to establish a price for a new deal this year. Andrew Lennox, an investor with Federated Hermes Limited, claims that the CLO market has been stagnant for some time.

Any extended closure will affect the actual economy, especially if it lengthens the duration of current loan packages, making it more difficult for lower-rated companies to renew at a time when traditional lenders are backing away.

As Scott McLean, head of leveraged loan strategy at AllianceBernstein LP, puts it, "The CLO market right now is like an old family station wagon; it's slowly moving forward, and premiums on other investment-grade bonds look better."

In the United States, the total volume of new deals and refinancing has decreased to roughly $102 billion this year, according to statistics gathered by Bloomberg. Comparatively, $134 billion was spent over the same period last year, and $350 billion was spent at the height of the foreclosure wave in 2021.

The so-called "arbitrage" earned by CLOs—basically what's left over after the monthly interest payments on their portfolio of loans—fell to more than a three-year low of about 175 basis points in August, though it has since strengthened slightly. Normally, this declining demand would be offset by falling prices for leveraged loans, but the lack of supply is keeping prices high.

According to Bloomberg, a $4.8 billion loan from direct lending goliaths Oak Hill Advisors and Blue Owl Capital was fully funded as part of Vista Equity Partners' refinancing of debt from fintech startup Finastra Group Holdings Ltd. The deal has had difficulty gaining backing from conventional lenders who use leverage.

Another threat to the leveraged bankers' cash cow is the development of CLOs by private lending companies. Despite their increasing influence, it is unclear if direct lenders would be able to completely replace the void created by exiting CLOs and their US bank backers.

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