Funds that securitize corporate loans saw redemptions from the first time in months, reflecting mounting concerns around credit quality.
Exchange-traded funds that hold bundles of corporate loans last week notched their first outflows since April, in the latest sign that investor concerns over credit quality are mounting.
ETFs of collateralized loan obligations experienced an outflow of about $516 million last week, marking the first investor exodus in about six months, analysts at JPMorgan Chase & Co. led by Rishad Ahluwalia wrote in a Monday report. That compares to a weekly average of about $421 million of inflows over the past year, according to the analysts.
Credit investors have turned more cautious after the implosions of auto lender Tricolor Holdings and car-parts supplier First Brands Group. Last week, JPMorgan CEO Jamie Dimon raised the alarm over the potential of more than one “cockroach”, warning that certain corners of the credit markets might see outsized losses if the economy sours. Banking shares also took a hit after two US regional banks unexpectedly disclosed loan losses on suspected fraud.
Leading the weekly outflows was the $25 billion Janus Henderson AAA CLO ETF (ticker JAAA), which invests in the highest-rated type of CLO bonds and had about $476 million withdrawals. That’s the most redemptions since tariff-induced volatility in April sparked record outflows. On Monday, the fund recorded another $10 million in outflows.
Other corners of the credit markets are also showing rising angst over credit quality and underwriting standards. Spreads on bonds issued by business development companies — which bundle private credit loans into publicly traded funds — have increased with some trading at their widest levels since the April market turmoil.
JPMorgan’s BDC index, which tracks BDC debt issuance, has widened by 60 basis points, to 220 basis points from 160 basis points. If sustained at these levels, they pose risks of spilling over into CLOs, the JPMorgan analysts wrote.
BDC bond spreads “remain in a comfortable range, but another leg wider is where we would be more concerned,” said Michael Anderson, Citigroup’s global head of credit strategy.
In another sign that BDCs have become a place to express credit stress fears, stocks of publicly traded BDCs have traded at multi-year lows in past weeks.
However, AAA spreads for private credit CLOs and broadly syndicated CLOs are much tighter, according to JPMorgan, despite also having credit exposure to leveraged borrowers.
Last week, JPMorgan analysts said “growth drivers seem unclear, especially at tight spreads,” and they expect new CLO issuance to be between $140 billion and $150 billion, down about 20% from this year’s expected issuance.
“CLO financing spreads have tightened and spread dispersion has declined, but idiosyncratic credit concerns, a fourth consecutive year of collateral rating downgrades outpacing rating upgrades, and an uncertain macro outlook will weigh on activity, in our view,” the analysts wrote Thursday.