NEW YORK: Blackstone Inc is forecasting an increase in mergers and acquisitions (M&As) that can help boost sales of bonds backed by leveraged loans.
Sales of these bonds, known as collateralised loan obligations (CLOs), reached a record of US$201bil last year, according to data compiled by Bloomberg.
Investor demand for the bonds was strong as money managers sought to buy securities that might see gains from rates being higher for longer than the market previously thought.
That helped make it cheaper to fund CLOs, allowing more of them to be assembled.
The high sales volume came even as private equity firms had relatively few buyouts to finance, and the supply of loans to bundle into the bonds was relatively light.
“We expect that issuance continues to be strong this year,” Michael Zawadzki, global chief investment officer at Blackstone’s credit and insurance unit, said.
“You have a tightening liability environment, you have a reasonably benign default outlook and you have an expectation for a lot of new issuance following an uptick in M&A this year. Those are excellent ingredients for CLO performance.”
Blackstone isn’t alone in expecting increased M&A activity to drive CLO sales this year.
Analysts from JPMorgan Chase & Co cited “a resurgence in M&A and leveraged buyout activity” in its 2025 outlook report, while Morgan Stanley analysts called for a increase in M&A activity and substantial increase in new money loan issuance.
Overall M&A volume climbed 16% last year to US$3.1 trillion, according to data compiled by Bloomberg. Still that was down from US$5.29 trillion in 2021.
M&A, in addition to other factors like the expectation that rates will stay higher for longer, enthusiasm from investors and managers to issue and lower risk premiums, should fuel more sales.
Citigroup Inc is calling for a record US$210bil in the primary markets, while Deutsche Bank is estimating US$205bil for new issue sales.
Another positive indicator already present in 2025 is the tightening of risk premiums for CLOs. In January, spreads on triple AAA-rated broadly syndicated loan CLOs tightened to 122 basis points over the benchmark, the lowest level in more than a decade, according to data from Nomura.
Earlier this month, Elmwood Asset Management sold a US$515mil new issue CLO with a 115 basis point spread over the benchmark, the tightest deal of its kind since the Great Recession, according to Nomura analysts.
The expected growth in 2025 would build on the solid performance in 2024. CLO total returns ranged between 8% and 21% due to sharp spread tightening.
CLO equity had its best year since 2021, averaging 25% for total returns, according to Nomura analysts.
“2024 was a really big maturation year for the CLO market where the investor base has deepened the asset class,” said Michael Sobol, head of CLO investing at Blackstone’s credit and insurance unit, which sold 35 US deals for more than US$18bil.
“There was good performance and it should be a continuation of that theme this year,” Sobol said. — Bloomberg