SOFR index has doubled overnight. Term SOFR forward curve steepens. CLO market shutdown
Overnight, [SOFR](https://www.chathamfinancial.com/technology/us-market-rates) increased from 0.75% (yesterday) to 1.45% (today) marking the largest one-day increase on record. More importantly, [the forward Term SOFR curve](https://www.chathamfinancial.com/technology/us-forward-curves) steepened, showing a top of 3.57% in December, compared to 1.53% today. Term SOFR provides an indication of the forward-looking measurement of overnight SOFR based on market expectations implied from the derivatives market. (Term SOFR is traded on CME)

This comes with a significant impact to the CLO market (reference my previous post on floating rate debt). We are seeing a near complete shutdown in the CLO market. Loan purchases in the secondary CLO market have completely halted on fixed rate debt and nearly shut down on floating rate, short term debt. 

Anecdotally, we have had three separate CLO lenders pull term sheets on active deals. I am interested to see the impact on floating rate bridge originated in the past 2 years. Our more institutional clients have been sitting on the backburner, holding cash waiting to strike. Smart money seems to think that a portion of the CLO originated in the past year lead to fire sales. They are targeting groups who over-levered while rates were low and are forced to refinance in a high interest rate environment. They predict that most refinances to perm will not pan out and that the only option will be to sell at below market.
[{"id": "icrjm0q", "text": "Ouch...", "replies": [], "depth": 1}, {"id": "ictac8w", "text": "Yeah, this was bound to happen eventually, I'm not going to be the least bit surprised if the land spree cools off for development now\n\nglad I sacked away a few deals while the money machine was set to 11", "replies": [], "depth": 1}, {"id": "icuzpz0", "text": "OP, In normal times or even pre the current bloodbath, how would the CLO market (with underlying CRE bridge loans) be affected by loan level rate cap purchases (we typically would have to buy a minimum of 2 years at 2%) as well as extensions considering many bridge loans had 3+1, 3+1+1 or even 4+1 structures.\n\nIt seems everyone is waiting for a bridge loan tsunami of defaults, but with rate caps in place and the ability to extend, will it be similar to CMBS 2010-2021? Where most loans looking for refinancing had a fairly easy time finding capital and the so-called \"Wall of Defaults\" coming out of the great recession was a nothing burger.\n\nOn a side note, I see an issue happening with Rate Caps that were purchased on 2020 say for $25k, that are now over $1m -- So even if lenders have been preparing and reserving a monthly pro-rata for the eventual rate cap rebuy, the borrower is in for a scary situation since most lenders are only reserving based on the original purchase, NOT current rates and a near term rebuy.\n\nAnd that's not even considering any scarcity premium on cap prices, since I've been seeing some banks leaving the rate cap offering space in recent months.\n\nEDIT: I also think lender allowed forbearance should be considered as well.. A very effective, however costly tool, that lenders used to avoid disaster during COVID.", "replies": [], "depth": 1}]