Participants expect CLOs could play a smaller role in the market for below-investment grade loans going forward.

Respondents in a survey from the Loan Syndications and Trading Association believe that issuance of collateralized loan obligations will continue to grow. They expect 2013 and 2014 volumes to materially outpace the $55 billion issued in 2012.

On the other hand, respondents do not expect the amount of outstanding CLOs to grow much at all.

“These results indicate that a considerable amount of the new CLO issuance may be done to simply refinance existing deals that are out of their reinvestment periods,” noted Meredith Coffey, LSTA executive vice president of research and analysis.

While the amount of CLO outstanding is expected to remain constant, the leveraged loan market is expected to grow. Nearly half respondents, who are LSTA members including banks, investors and traders, forecast annual institutional loan issuance to reach $500 billion or more in coming years, up from $295 billion in 2012.

More than half the respondents expect outstanding loan volume in the S&P/LSTA Leveraged Loan Index to exceed $650 billion by the end of 2014. It has already increased from $550 billion in December 2012 to $623 billion in September 2013.

At the same time, over half the respondents also expect assets under management in loan mutual funds to top $150 billion by the end of next year.

“In the face of significant concern over the potential for rising interest rates, investors are increasing attracted to the loan market because loans offer variable interest rates and significantly better protection in the case of default,” commented Bram Smith, executive director of the LSTA. “Partly as a result of this increased investor demand, institutional loan volumes are also expected to rise, as borrowers take advantage of better conditions.”

Bank lending, in which banks keep loans rather than selling them to institutional investors, is expected to be generally flat. Some survey respondents believe leveraged lending by banks may grow but, at the same time, more respondents see investment grade loan issuance falling rather than rising. The survey was taken over the last three weeks of August.

In both the institutional and bank markets, lender demand could outstrip supply, causing spreads to continue to normalize from their post-financial crisis levels. Nearly half of all respondents expect spreads to tighten from July’s Libor plus 405 basis points seen in the institutional market. Leveraged bank loan spreads are also expected to contract from July’s Libor plus 359 basis points.

Additionally, survey respondents expect secondary loan prices to climb on materially higher trading volumes.

“There remains continued strong interest in the loan markets,” said Coffey. “In fact, respondents believe that secondary trading volumes could hit record levels.”

Survey respondents also answered questions about potential threats to the loan market. In the near term, respondents identified three main issues: the end of the Federal Reserve’s quantitative easing program, an increase in aggressive loan terms and conditions and, finally, new regulation with potentially harmful effects consequences. Longer term, in this case 2015, respondents cite regulation as their biggest concern.

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