Issuance of CLOs in the U.S. market this year fell short of 2014 totals will fall further next year, Wells Fargo Securities Senior Analyst David Preston said in a recent report.
While 2015 deal volume outpaced last year’s activity for the first five months of the year, it slowed down during the second half. New issue volume year-to-date is $90.7 billion—79% of the 2014 year-to-date volume.
Only 75 of the 105 managers that issued in 2014 have done so in 2015 through Nov. 21. Of the eighty-five that did bring CLOs to market, only 5 were first-time issuers.
“We project the U.S. CLO market to issue 70-80% of 2015 volume in 2016, for a 2016 year-end total of $75 billion--implying loan issuance of roughly $250 billion,” the Nov. 24 report states.
Among the drivers of this projected dip in issuance will be risk retention regulations, increasing credit concerns and higher funding costs.
Though the risk retention regulations—which will require CLO managers to retain 5% of the notional amount of deals—will take effect in late December 2016, the requirement has already dealt a blow to issuance.
Investors have been demanding that some managers issue risk retention-compliant deals ahead of the deadline, which may have kept some firms on the sidelines this year, as they may not have access to the capital needed to fund the 5% of a CLO, the report notes.
Things could ramp up at the start of next year, however.
In the report, Preston notes that an increase in activity may be seen during the early part of 2016, as managers make up for the slow down during the final quarter of this year.
Also, those managers who have worked out their financing plans to get “skin in the game” could allow for more issuance in 2016, the report states.
“Second, a falling loan market in Q4 2015 should help managers ramp portfolios for issuance in Q1 2016,” Preston wrote. “Last, run-off may provide a boost to issuance, as we forecast the possibility of $50 billion in runoff from CLO 1.0 amortization and calls.”