The U.S. collateralized loan obligation market is off to a slower-than-expected start, and this is causing market participants to lower their expectations for 2015 as a whole.
Barclays, for one, has trimmed its full year forecast to a range of $90 billion to $100 billion, from as high as $120 billion originally.
So far this year, about $13 billion has priced across 24 deals. That is well off the pace set last year, which was a banner year of issuance for the asset class. Some $124 billion of deals were printed in 2014, according to Thomson Reuters LPC.
Barclays based its original forecast on expectations that CLO managers would rush to issue new deals ahead of rules requiring them to keep “skin in the game.” Beginning in 2016, they will be required to hold on to 5% of the risk in these deals.
In a research note published today, analysts said that this “pull forward” effect has not really materialized, in large part because issuance of the loans used as collateral has stalled and in part because of concerns about holdings of loans issued by energy companies.
Loan volume is under pressure from regulatory guidance on loan underwriting standards. Analysts at Barclays and other firms believe that this is reducing the amount of loans issued to finance leveraged buyouts. In its report, Barclays noted that LBO issuance has composed 20% of total loan supply, in recent years, and LBOs with leverage of greater than 6x have made up 11%.
“Predicting the effect of the guidelines in a rigorous way is no easy feat, because there is potential both for a substitution effect (some deals will get done, just below 6x) and for the deal to be abandoned.” The analysts foresee a mix of both effects, with LBO issuance decreasing overall and high-leverage deals falling as a percentage of that smaller pie.
Barclays still thinks that CLO issuance will pick up later this year as managers figure out a way forward in the primary market and energy fears fade into the background. Still, the lack of new loans may lead to more spread tightening, making it less attractive to securitize them.
In a separate report issued Friday, Wells Fargo Securities analyst David Preston noted that the slower primary CLO calendar has resulted in tighter spreads this month with primary AAA spreads at 150-155 basis points over one-month Libor, or 5-10 basis points tighter than in December and January.
“We think risk retention concerns may be driving some of the primary tightening; much of the 2015 issuance has been by more established CLO managers, who generally are able to get better AAA pricing,” wrote Preston.
Of the 24 CLO deals thus far in 2015, “almost 60% were issued by managers with at least eight post-crisis CLOs issued, with an additional pair of CLOs issued by managers with at least six post-crisis CLOs issued.”