Issuance of new U.S. collateralized loan obligations is likely to level off after ‘skyrocketing’ in the first quarter, according to Fitch Ratings.
New issue volume increased nearly five-fold in the first quarter to over $26 billion compared with $6 billion in the same period of 2012. But Fitch said much of the first quarter volume was the result of deals being pulled forward ahead of a Federal Deposit Insurance Corp. rule requiring banks to consider CLO investments among “higher risk” assets.
Bank are important buyers of the top-rated tranches of CLO notes, but the FDIC rule, which took effect April 1, requires banks to treat all notes issued by CLOs as equally risky, regardless of their credit rating.
The rule grandfathers CLO issued prior to April 1, hence the push by originators to bring deals to market before the end of the first quarter.
Fitch noted that the general consensus remains that new CLOs will finish the year in the $55 billion-$75 billion range.
Despite the expected slowdown in issuance over the remainder of 2013, Fitch said, appetite for CLOs on the part of banks and other investors remains “robust.” Given the relative lack of new loan issuance This means it will remain difficult for CLO managers to find sufficient loans to use as collateral for deals. Loans with strong covenants are particularly hard to find.