Barclays expects issuance of collateralized loan obligations in 2014 to be similar to this year’s total, in the range of $75 billion to $80 billion.
While risk retention rules on CLOs, expected to take effect sometime in 2016, could significantly curtail issuance past that date, Barclays expects that, in the meantime, CLO managers will look to grow the consistent stream of fees that these investment vehicles produce. In fact, the rules, which require sponsors to retain a 5% stake in CLOs, could pull issuance forward, analysts at the bank said in their weekly research publication, U.S. Credit Alpha.
Barclays takes this view despite the fact that spreads on the senior, AAA-rated tranches of CLOs are wide relative to other AA-rated assets because of their lack of liquidity and are likely to remain so.
So far this year, Barclays said, CLO issuance has far outpaced the roughly $40 billion of existing issuance that amortized during the years.
While AAA spreads could remain wide relative to other AAA assets because of their lack of liquidity, we believe CLO managers will look to grow the consistent stream of management fees that CLOs produce with non-recourse leverage, supporting further issuance next year.. Taking these factors into account, we believe 2014 CLO issuance will be similar to this year’s total and expect it to fall within $75-85bn.
With $25 billion to $35 billion in net demand for loans from CLOs and strong demand expected from the retail investor (mutual fund) buyer base when tapering begins, Barclays anticipates another year of solid issuance for leveraged loans as well, with $340 billion to $360 billion in total supply, excluding repricings.
However, changes in guidance from regulators on leveraged lending could be a significant downside risk to this forecast. “While it is too early to determine the extent to which the guidelines will lead to a slowdown in loan issuance, it is worth noting that a significant share of loan proceeds tend to be used for purposes that tend to increase leverage,” the analysts stated. In the past four years, for example, M&A, LBO, and dividend deals have accounted for 50-60% of total volumes, excluding repricings.