A flood of new and returning investors in the $600 billion U.S. collateralized loan obligation market is setting the stage for a feeding frenzy among the world's largest money managers.
Fidelity Investments has entered the market, J.P. Morgan Chase & Co. is back from a brief absence and others including Pacific Investment Management Co. have boosted purchases in recent months, according to people familiar with the matter. Add in Japanese mega-buyer Norinchukin Bank's return after a dramatic second quarter pullback, and industry veterans see a battle brewing for the top-rated CLO tranches.
Investors are on the hunt for higher-paying assets as central banks around the world move closer to easing mode, pushing yields on some $12.5 trillion of bonds into negative territory. In the CLO market, where risk premiums have been more resistant to tightening than other asset classes in 2019, the increase in buyers could result in a spike in demand for the loans that get bundled into the securities. That would lower borrowing costs for junk-rated companies and help increase the volume of leveraged buyouts, but could also add air to a market that regulators worry is already over-inflated.
"There are more buyers looking to put money into CLOs," said Michael Herzig, head of business development for THL Credit, pointing to renewed interest from U.S. banks and money managers as well as the return of Japanese buyers. THL manages 20 CLOs. "The market is going to be a mix of anchored and syndicated deals."
Representatives for Fidelity, J.P. Morgan and PIMCO declined to comment on the extent of their recent CLO purchases.