Record year for US CLO issuance

Issuance of collateralized loan obligations reached a record high US$123.8 billion from 237 deals in 2014, according to a report by offshore law and fiduciary firm Appleby. 

Sales of the debt securities comprised of leveraged loans made to low-rated companies even exceeded the levels during the credit boom before the financial crisis in 2006.  

Issuance of new CLOs surged last year as companies took advantage of low refinancing costs and investors looked for higher yielding assets. The asset class has experienced a remarkable resurgence since 2008, when only eight deals worth $3.2 billion were issued. In 2013, 188 CLO deals were sold for a total value of $89 billion, the CLO Insider Report for the second half of 2014 noted.  

Despite the record issuance new regulations may slow growth next year.  

“CLO activity continued to gather momentum in the second half of 2014, reaching record levels of issuance,” said Julian Black, Cayman-based partner and global head of structured finance at Appleby. “However, the regulatory changes brought about by both the risk retention rule and the Volcker Rule, and requirements under Basel III, will likely slow the pace of issuance in 2015-2016.”  

The 2010 Dodd-Frank financial law requires banks and other firms to retain some of the risk from asset-backed securities they structure, manage and sell to investors. The final rules stipulate that CLO managers have to retain a 5 percent interest in the loans underlying the securities.  

While regulators have warned of the creation of another debt bubble, the Loan Syndications and Trading Association said today’s deals are safer than their pre-crisis counterparts, and most of the new CLOs are refinancing older ones rather than funding new deals.  

The industry body has lobbied regulators hard not to impede the CLO market, saying that risk retention rules would disproportionately punish a market segment that, unlike the more complex collateralized debt obligations, was not involved in the credit crisis, and that provides important financing to below investment grade companies. 

Outlook 

Appleby noted changing market dynamics with new types of CLO investors, such as hedge funds, pension funds and insurance companies entering the market, and predicted that the consolidation of smaller managers will continue in 2015 as they will find it harder to comply with risk retention rules.  

Based on the final six months of last year and Appleby’s own pipeline of more than 30 warehoused deals, the law firm maintains a strong forecast for CLOs for the first half of 2015.  

“We anticipate that the combination of a steady credit environment and stable interest rates will maintain investor demand for CLO debt and equity tranches in the first half of 2015,” said George Bashforth, head of directorship services, Appleby Trust (Cayman) Ltd. “By the second half of the year, however, we expect issuance growth to dampen, with analysts predicting that by the end of the year we will see new issuance retreat to 2013 levels.” 

In Europe, meanwhile, CLO deals have recovered from a post-financial crisis low, but issuance is still well below the €35.5 billion (US$41.8 billion) high issued in 2006. 

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Collateralized loan obligations reached a record high US$123.8 billion from 237 deals in 2014.
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