The volume of new CLOs may triple the level reached in 2010, according to a Wells Fargo analyst.

Dave Preston, the analyst at Wells Fargo, projected CLO issuance of $12 billion to $15 billion, up from approximately $5 billion in 2010.

The CLO market, he said, will continue to surge in 2012, with volumes reaching a range between $25 and $30 billion.

“Improving credit fundamentals, along with fewer CCC loans, directly correlates to improved CLO performance,” Preston said. “The percentage of CLOs failing overcollateralization tests in now below 10—the ratio has not been in single digits since early 2009."

He added that CLOs have "proved their mettle and their worth" in the past three years. The lesson learned from 2009 and 2010 is that the CLO structure has performed as designed. CLOs may require more work, but we believe investors are rewarded for the additional work.

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