Barclays and JPMorgan are both forecasting a decline in issuance of collateralized loan obligations next year, citing a variety of regulatory and market headwinds tamping down demand for the securities.
JPMorgan has the more pessimistic outlook; its calling for as little as $60 billion; that is less than half the $124 billion in record volume for 2014.
Barclays analysts see issuance in the range of $70 billion to $80 billion next year. The bank is projecting this year’s market volume will exceed $95 billion, within its original projections of $90 billion to $110 billion.
The decline comes despite an expected uptick in new senior loan issuance to between $250 billion and $270 billion, ex-repricings, from a projected 2015 year-end total of $245 billion, according to Barclays.
Risk retention and a bulge of refinancing volume toward the end of 2016 are the key headwinds to new issuance. Also playing a role is the consolidation of managers as firms seek out new investment vehicle structures to house the 5% stake they’ll be required to hold in deals issued after next December.
“2016 is the final year in which risk retention is not enforced, and while only a minority of deals issued this year have been explicitly compliant, a plan for eventual compliance has been an increasing focus for CLO investors and managers,” Barclays states in its report.
Fewer new managers have placed CLOs thus far in 2015 (six, compared with 18 in 2014), and more managers are in the stage of identifying “sustainable, compliant structures” to follow the new rules regime in 2017, including consolidations of firms to better house the retained assets.
Last week, Hartford, Conn.-based global investment company Conning announced it was acquiring specialized credit asset class firm Octagon Credit Investors in a deal that includes providing capital to Octagon to comply with risk retention compliance (Octagon is being permitted to retain its own board of directors as a Conning subsidiary).
Under the risk retention standards adopted by the Federal Reserve and other regulatory authorities, managers would need to hold $25 million in notional value of a CLO issued with $500 million in assets.
Another damping effect, Barclays says, is the “significant” volume of CLOs issued in 2014 that are coming up for refinancing next year. Many have shorter, 1.5-year non-call periods because their managers wanted to avoid triggering risk retention requirement if they were refinanced after December 2016. One estimate, from Wells Fargo, pegs next year's refinancing volume at $261 billion.
“That said,” the Barclays analysts wrote, “the composition of the outstanding CLO market should be constructive for incremental loan demand next year, as nearly 80% of CLO structures are still in their reinvestment periods."