Collateralized Loan Obligation (CLO) issuance in Q1 2015 was both surprisingly strong and represented a diverse set of structures trying to meet investor demand. Managers are finding it more and more difficult to differentiate themselves in a crowded market, in which common constraints on what assets they can hold has increasingly leveled the playing field. Looking for new approaches, both up-and-coming and established managers priced a variety of structures and loans. Though the first quarter of this year might seem to demonstrate a new vitality in a market that many thought would be minimized by regulation, the question remains: Even with the broadening of the CLO marketplace, what does the future hold for the asset class? And, what does this imply for investors now and into the future?
In a recent panel discussion, practitioners from S&P Capital IQ® and the industry saw mixed signals coming from the market and ultimately concluded that it is unclear what the longer term impact of these changes may be. A few key factors were explored, including:
Imminent Regulatory Changes: Once seen as a doomsday scenario for CLOs, the regulatory impact of the Volker rule has not yet been the throttle on issuance that was expected. In preparation for complying with the Volker Rule in 2017, many of the outstanding loans have already been “Volckerized” either by amendments made to existing structures or by refinancing. Panelists agreed that this aids in defying many of the unfavorable predictions made last year.
Unpredictable Market Performance: In terms of sector performance, panelists discussed the importance of the skill of managers – apparently one good way to differentiate. The recent recovery in oil and gas markets demonstrated that a rally in one sector has the potential to drive overall performance. Therefore, the CLO managers’ skills in a particular market and their ability to apply this knowledge to asset selection is a unique aspect of what they bring to the table. Investors recognize this as key factor in the ultimate performance of the securities.
Bottom Line: Even with the regulatory changes, CLOs remain an attractive asset class, and according to the panelists will remain a strong performer throughout the year despite market challenges, though the playing field
for managers may not be as even as it may seem on the surface.