ABS & CLO market highlights from 2Q 2024

ABS issuance continued at a blistering pace in 2Q 2024, with quarterly issuance of $94.5 billion standing just under 1Q 2024’s total of $95.1 billion, and the first half total marking a record level of $189.6 billion. While strong investor appetite has enabled issuers to tap the ABS market at favorable funding costs so far this year, election-related volatility as well as a flood of early 2024 issuance point to a slower second half of the year.

Consumer ABS pools saw tax-season-associated improvements, though losses and delinquencies in the auto space are at or near all-time highs. However, there is room for optimism in new deals as underwriting tightens. While unsecured consumer debt also is seeing elevated losses and delinquencies, KBRA’s latest performance index has seen stable-to-improving performance in the early months of 2024 (particularly among lower FICO transactions).

Secondary ABS spreads have stayed range-bound through much of 2024 after tightening late last year as investor demand remains strong despite an influx of supply across most asset classes. Election-related volatility and recent softening macroeconomic readings (such as rising jobless claims and sticky inflation) serve as potential headwinds looking ahead, though dampened primary supply in the second half of 2024 could support tighter spreads.

CLO issuance in the 2nd quarter was robust, with new issuance at its highest level since 4Q 2021 and combined refinancings/resets hitting a quarterly record on the back of the lowest funding costs in two years.

Investor demand for CLOs has kept funding costs tight through 2024, with 2nd quarter average AAA coupons tightening 48 bps year-over-year to 150 bps. Across the full capital stack, the average cost of capital stands roughly in line with the lowest level seen since 1Q 2022. Additionally, with demand at robust levels, manager tiering has largely eroded, with long-time managers and new names seeing very little basis between spreads.

Banks and private credit lenders have battled for market share in the last two years, with private credit providers fighting back in 2Q 2024 after a wave of refinancings went to the BSL space in the 1st quarter. Borrowers refinancing BSLs into the private credit space outpaced direct loans going to the BSL market by $1.7 billion in the 2nd quarter, after the 1st quarter saw a net $8.9 billion leave the private credit space upon refinancing.