Leveraged loan market players made the optimistic prediction last week that CLOs would return to the loan market stage by January or February of 2008. The topic was one of many discussed by market participants at the 13th annual Reuters Loan Pricing Corporation Gold Sheets conference.
Most agree that the deals in the pipeline need to be completely or mostly cleared before CLOs can begin ramping up. "The fourth quarter will be interesting because we're seeing the buy and sell side coming together to see how they can get rid of what is already on the books," said Hugh Gravenhorst, managing director at Black Diamond Capital Management.
Industry players said CLOs could weather the storm if they vary the pricing and structures of the deals. "We're seeing mult-manager CLOs and banks offering different financing schemes to burn off the unsydicated debt," said Kenneth Kencel, president of Churchill Financial Management. Others said the industry is witnessing a return to a "true" credit market where confidence in liability pricing is crucial.
Some of the newer structures include shorter duration transactions and lower leverage and management fees, according to David Heilbrunn, senior managing director at Bear Stearns.
"The fundamentals in the market remain sound," said Michael Zupon, a managing director at The Carlyle Group. "Many investors will double down if they have the chance. ... There is extraordinary interest in this asset class." And despite the downturn, $6 billion of CLO deals closed in August, up from $4 billion in July, according to some calculations.
"We're trying to find double As and Bs to get back in it," said Mavis Taintor, co-managing partner at Callidus Capital Management, a New York City-based CLO manager. "I think once the SIVs get cleared, we'll start to see more double and triple A deals get done."
The middle market will also play an important role, Kencel said. "The [mid-market] will be attractive to CLOs because deals in those markets are getting done faster," he said. Kencel specified the mid-market as deals ranging from $400 to $800 million in size.
Market Doubts
However, some are skeptical. "The assessment that CLOs will come back in less than six to seven months is wrong," said one loan banker. "CLOs will likely come back, but if they don't someone else will take their place. ... The market existed without them before."
Moreover, CLOs are not as huge a factor as some think, a portfolio manager said. But others at the conference said CLOs account for approximately 60% of the loan market. "There is a dichotomy with CLOs because even if CLOs go back to normal early in 2008, I don't think it will normalized and clear what's in the pipeline," said Damon DiCastri, partner at Winston & Strawn.
Some say it's important for CLOs to stay on the sidelines in the near term. "We have to look back in history to move forward," said Denis Coleman, a managing director at Goldman Sachs. "History tells us that CLOs are important, but non-CLOs will be a catalyst in the months ahead because the quality of a company and the price will be more important. ... We're going to see all different types of structures and more traditional types of investors."
"There are still a lot of attractive opportunities for the CLOs out there," said Mark DeNatale, a managing director at Goldman Sachs.
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