The mood was calm at The Loan Syndications and Trading Association's annual membership meeting last Tuesday, despite expectations of an uncertain year ahead for CLOs.
"This is a very challenging financial environment; the financial system is getting hammered," said panelist Tom Newberry, head of the syndicated loan group at Credit Suisse. "There is a crisis of confidence."
Indeed, CLO liability spreads that were in the mid-40s in July have widened out 130 to 140 basis points, said panelist Rick Stewart, managing director and portfolio manager at Nomura. As market volatility increases, it might mean this spread widening will continue.
The panel, which was moderated by Steve Miller, managing director of Standard & Poor's LCD, also included Jonathan Calder, head of loan sales and trading at Citi, and Payson Swaffield, chief income investment officer at Eaton Vance.
Panelists discussed the increasing number of loan amendments and expectations for rising loan defaults. "Distressed analysts on the desk are somewhat overwhelmed," Newberry said. "Companies are at the threshold of defaulting on their covenants or tripping them."
Indeed, defaults have been so low for such a long time that it can be expected that they will revert to the mean, Swaffield said. "Seven times leverage did not exist two or three years ago but it has crept up over the last 18 months and that could be a source of default," he said, adding that the market is seeing interest rate payments slow down outside of just homebuilders.
However, rising defaults will not necessarily discourage new issuance in the market, especially for a vehicle that has weathered the storm for the second time when a sister vehicle was hit, panelists said. They cited the current unwinds in the ABS CDO sector as well as the CBO market troubles seen in 2001 and 2002. "CLOs will be back on a much reduced scale in 2008," Stewart said. "We saw new issuance at the end of 2007, and there are still new deals today."
Swaffield noted that there is still interest on the institutional side as market troubles have not completely injured pension funds or institutional money.
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