ABS & CLO market highlights from 3Q 2024

ABS Market

• A seasonal summer slowdown led ABS issuance to moderate from recent highs in 3Q 2024, with quarterly issuance of $80.4 billion falling by 14.9% from 2Q 2024’s level after two near-record quarters of issuance. Though quarterly issuance is down, year-to-date issuance of $270 billion has already surpassed last year’s full-year total and is on track for a record year.
• Consumer debt is seeing branching trends across the credit spectrum this year, with lower-FICO performance largely stabilizing and higher-FICO performance continuing to worsen. While many lenders in the subprime space were quick to tighten underwriting, leading losses and delinquencies to slow or decline across asset classes, lenders did not adjust as quickly in the prime space, leading to continued weak performance as inflation, growing debt burdens and job market pressures catch up to higher-credit borrowers.
• Secondary ABS spreads saw a slight gravitation upwards in August, tracking broader market volatility after some weaker-than-expected job market numbers, but then largely tightened in the weeks following the report (particularly after the Fed rate cut) and remain largely range-bound through 2024. Election-related volatility and recent softening macroeconomic readings still serve as potential headwinds looking ahead, but dampened primary supply and strong demand in 4Q 2024 are likely to continue supporting spreads.

CLO Market

• Although CLO new issuance contracted over the summer, refinancings and resets surged, bringing total CLO issuance in the third quarter to a record level as issuers took advantage of healthy demand to reduce funding costs on outstanding CLOs. Demand for middle market and private credit CLOs is unwavering, with $27.3 billion of MM/private credit CLO new issuance through 3Q this year edging just ahead of 2023’s previous full-year record of $27.1 billion.
• Investor demand for CLOs has kept funding costs attractive through 2024, and spreads continued to tighten in the third quarter, with average AAA coupons falling 12 bps from 2Q 2024 levels. Across the full capital stack, the average cost of capital for BSL CLOs fell to the lowest level seen since 4Q 2021.
• The growth of private credit has led to a battle for market share between banks and private lenders, with recent refinancings going back and forth between the broadly syndicated and direct lending markets. While private credit lenders have begun to take back market share after a surge of bank activity in the first quarter, they've done so at the cost of significant spread.