Sixty percent of CLO managers, arrangers and investors believe that this year’s red-hot collateralized loan obligation issuance volume will surpass 2013’s near-record volume and some believe it may even top the pre-crisis high-water mark, according to a mid-year survey by Thomson Reuters LPC.
With $54 billion already reached in new CLO issuance in 2014 including $32 billion thus far in the second quarter— volume is now 33 percent above the pace set last year, which ended with $82 billion in CLOs being issued, according to Thomson Reuters. The record is the $88.9 billion volume issued in 2007.
Forty percent of those surveyed expect CLO issuance could reach $80 billion to $90 billion, and an additional twenty percent believe the volume could equal or surpass $100 billion. “And there is reason to be optimistic,” according to Thomson Reuters’ weekly credit market snapshot issued Monday. “The new CLOs are Volcker compliant and the investor base is expanding as AAA spreads remain high, making them more attractive relative to other assets.”
New CLOs are being constructed without bonds in order to conform with Volcker Rule restrictions against banks investing in hedge and equity funds. They are also being revised with new investment criteria that would restrict the CLOs from investing in non-loan securities.
Also in the mid-year survey, Thomson Reuters reports that “risk retention and inclusion of bonds” remain a concern regarding the non-compliant CLOs, many of which were issued in 2011-2013 with corporate high-yield bonds included. Banks holding these partially bond-backed CLOs have until July 2017 to divest or restructure them without bond tranches.
Issuers will be looking to update existing deals with an “eye toward removing bond buckets, incorporating springing securities baskets, giving up manager control provisions or divesting AAA notes among non-Volcker compliant CLOs.”