The early amortization of Sanwa Bank's $2 billion collateralized loan obligation has yet to trigger much pause to what has been a breakout market, as the CLO sector continues its white-hot pace with over 30 deals awaiting ratings and hoping to close before year end.
Eileen Murphy, managing director of structured finance and derivatives at Moody's Investors Service, expects $15 billion in CBO/CLO volume to hit the market before 2000. "We're looking at over 70 names right now," Murphy said.
Of course, not all of those names will make it in before year end - Murphy predicts that most likely 30 will make the cut - but it speaks to the volume that continues to churn in the market.
Another sector expert expects heftier sizes on the upcoming deals, as larger-sized offerings become less of a trend and more of the rule going forward, as issuers that have embraced bigger volumes convince enough investors to do the same.
"Eight of those deals are over $1 billion," the source said about the expected 30. "So with only eight deals, we're halfway to the volume we expect."
The Buzz On Sanwa
Of the two defaulted loans that triggered Sanwa's Excelsior CLO to an early amortization event, one was rated Baa by Moody's - a fairly high rating according to Eun Choi, a senior analyst in Moody's structured finance department. The other loan was "not such a good credit," she said.
Because the Sanwa CLO has proved that a large, relatively highly rated loan can default and wreck a transaction, Choi suggested that investors look for more of a cushion, "in the cash collateral piece, if possible," in the structure of these deals to protect from this situation.
A cash-collateral account may help banks avoid such an event, as the default would be less catastrophic, despite the larger volume of a typical loan in a CLO transaction.
Last week, Moody's announced it had placed the subordinate tranche of Sanwa's Excelsior CLO on downgrade watch following its early amortization.
Speaking at International Management Network's fifth annual securitization conference last week in Bermuda, Choi said that while CLOs have largely inherited their structure from the credit-card sector, they did not inherit the smaller account size typical in most card deal structures. For this reason, the larger size of the individual loans in a CLO can make defaults more damaging to a deal.
"In order for [the early am triggers to be hit], a large number of credit card defaults would have to occur," Choi said. "In these types of transactions, where loans make up 1% to 2% of the deal, it's quite possible for an event to happen."
On whether the market should brace for aftershocks, one source said the chance was likely that 10 or so of the aforementioned deals would "die off" due to their inability to attract a sale.