Nearly half of loan market players surveyed by Thomson Reuters LPC in September expect that issuance of collateralized loan obligations will reach upwards of $125 billion this year.
Another 36% expect issuance to reach $125 billion this year while 14% expect it to beat $125 billion.
Issuance of early $90 billion so far this year has been driven by attractive pricing of leveraged loans and a desire by managers to add to assets before risk retention rules take effect. Rules are expected to be finalized by year end, though there will be a two year to comply.
CLOs issue bonds and use the proceeds to acquire loans, and loan spreads have narrowed over the past few months as investors flee loan mutual funds, which have also been big buyers. Thomson Reuters LPC said in its third quarter review Wednesday that most market players expect mutual fund investors will continue to withdraw $1 billion to $2 billion a month from these investment vehicles, while some see the pace accelerating to $3 billion or more a month.
Increased supply of CLOs has not had much impact on spreads of the senior securities issued by these deals, which have been stuck in the 140 155 basis points range, That’s because the investor base, once dominated by banks has been expanding to includes more participation from pension funds, insurance companies, asset managers, hedge funds, money managers and Asian banks and investors.
Thomson Reuters LPC also said that roughly half of the 20 CLOs that have refinanced this year took advantage of the opportunity to become compliant with the Volcker Rule. This rule, which was finalized in December 2013, puts CLOs that hold bonds or other securities off limits to banks.
Most new CLOs do not have the ability to invest in bonds and managers have been using second-lien loans as a replacement. Partly as a result, issuance of second-lien loans reached $29.6 billion in the first nine months of 2014, which Thomson Reuters LPS said is roughly on par with issuance at this time last year and is poised to beat 2007’s$40 billion full year record.