After three-year retreat, Wells Fargo jumping back into CLOs

Wells Fargo & Co. is ramping up buying top-rated collateralized loan obligations, after largely staying away from the $1.3 trillion market following interest rate hikes in 2022, according to people with knowledge of the matter.

Wells Fargo has broadly been in talks with managers to buy AAA rated CLO bonds, said the people, who asked not to be identified discussing private information. In the past few months, the bank has already bought into a handful of CLO transactions, which buy and pool buyout debt, some of the people said.

The bank has signaled to market participants that they are likely to dedicate more capital for top-rated CLO deals now that the Federal Reserve has lifted its seven-year-long asset cap on the bank, they said.

Wells Fargo was once among the largest buyers of highest-rated CLO bonds, alongside other banks including JPMorgan Chase & Co. and Bank of America Corp. Many banks only took a six-to-12-month hiatus from CLOs after rate hikes put pressure on their balance sheets in 2022, but Wells Fargo has mostly stayed out of the market since.

A representative for Wells Fargo declined to comment.

Wells Fargo is different than it was the last time it was a heavy buyer of CLOs. When the bank retreated in 2022, it was still subject to an asset cap imposed by the Fed, limiting its balance sheet.

That cap was removed last month, paving the way for Chief Executive Officer Charlie Scharf to push for growth. The bank has already been making hires to ramp up trading operations that were limited by the cap as well as investment bankers in a bid to win more underwriting and advisory business. 

For CLO managers, Wells Fargo’s recent return to the market is welcome. While more firms have entered the market to buy AAA CLO bonds, few are as large as US and Japanese banks, which still dominate the market. CLO managers also need to lock in AAA tranches to wrap up a deal, as the bonds represent about 60% of the transaction.

Some banks have been willing to underwrite the AAA portions of the CLO vehicles they arrange, ensuring that they’ll take on the securities they cannot sell.

Spreads on top-rated CLO bonds are hovering around 130 basis points over the Secured Overnight Financing Rate, tighter than the almost 150 basis points that the bonds were pricing at following the US tariff announcements in April.

However, CLO managers are still facing a shortage of buyout loans that they can buy for their vehicles and there’s still a risk of a looming recession. Barclays Plc recently lowered its forecast for new issuance of CLOs to $180 billion, according to a report. Barclays also said spreads for AAA CLOs tied to broadly syndicated loans are poised to land at 125 basis points over the benchmark by the end of the year, wider than earlier expectations.

Sales of US CLOs stand at about $101.4 billion so far this year, a slight slowdown from this time last year, according to data compiled by Bloomberg News.