Recap: Staying Ahead Of The Collateralized Loan Obligation (CLO) Market Breakfast Briefing (Part I of III)

The CLO market is at a juncture. 2015 could be a great year for CLO issuers and investors, but it could also be a very troubling year for both. A recent panel discussion hosted by S&P Capital IQ focused on some of these challenges and attempted to read the tealeaves, highlighting the positive and negative signs in the market.

CLO managers issued a record $124.1 billion in 2014, as compared with a total of $83 billion in new issues in 2013[1], and up from the last market high of $97 billion in 2006[2]. This year, we started off slowly in January, but momentum began to pick up in February, and really picked up steam in the first week in March. Last week, seven new deals priced for a total value of $3.91 billion in new issuance[3]. These deals brought this year’s total to 34 deals, as compared with 28 at the same point in our record-breaking last year. But, many questions still remain:

  • What does this mean for the market as a whole?
  • Have we really managed to escape the dire predictions of last year? Especially when some were estimating that half of the $350 billion in outstanding CLOs would have to be restructured in order to comply with new Volcker Rule requirements?

Industry analysts were predicting consolidation and as much as a 60% contraction in the market if risk retention rules were not changed[4].

These market conditions and uncertainties set the stage for a very active discussion with industry investors and CLO managers on March 12, 2015 in New York. Here are just a few highlights:

General Market Trends

  • Concerns Remain - Despite the high rate of issuance over the last four to six weeks, not everyone is bullish on the market. Concerns remain on the broader loan market and the adequacy of the risk retention solutions currently available.
  • Challenges In Sourcing Loans - Doubts remain about the current level of M&A activity and its ability to generate the necessary leveraged loan volume to meet demand. Participants noted as much as a 60% drop in leveraged loan volume year over year[1]. Though pipelines are robust, volumes are not expected to be as large as last year.
  • Problems For Equity Investors - In particular, equity investors may face difficulties if spreads tighten and arbitrage opportunities disappear.

Overall State Of The Economy

  • Disintermediation – Panelists cited the fact that Wall Street is being squeezed out as the traditional deal funding middleman as a result of regulations and capital funding requirements, therefore, private equity and other cash-rich companies are stepping in to fill in the gap.
  • Few Predictions on Rate Risks - In assessing interest rate, credit and default risk for CLOs, no predictions were made by the panelists on how these alternatives would perform under changing conditions. What do you think?

With such a varied discussion, it is clear that there are many aspects of the market for CLOs that must be considered as an investor or issuer prepares for the remainder of 2015.

Stay tuned next week for additional insight on the impact of Fed Rate increases, and more. To learn about S&P Capital IQ’s portfolio capabilities for structured finance assets and to download white papers on the topic, please visit our microsite.

Related White Papers

[1] S&P Capital IQ Leveraged, Commentary and Data (January 7, 2015)

[2] S&P Capital IQ Leveraged, Commentary and Data (January 7, 2015)

[3] S&P Capital IQ Leveraged, Commentary and Data (March 9, 2015)

[4] Wiltermuth, J. (2014) “CLO Market Sees Future In Consolidation”. Available here 

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