Wells Fargo expects U.S. issuance of collateralized loan obligations to moderate in 2014, to $60 billion, partly as the result of regulations that make it less attractive to manage or own these securities.
By comparison, $75 billion of U.S. CLOs were issued through November of this year, marking the third-highest year on record, trailing only 2006 and 2007.
With some $40 billion$45 billion of CLOs expected to be redeemed or amortize in 2014, the market would still grow by about $20 billion, however.
This year, issuance was heavily weighted toward the first quarter of the year, before new deposit insurance rules making CLOs less attractive to bank buyers took effect. Competition from retail mutual funds for the corporate loans used as collateral also made issuance less attractive, since the resulting decline in interest rates on the loans made them attractive to securitize. However, issuance has picked up in the fourth quarter. “It is instructive to point out that despite all the talk of a lack of AAA investors, regulatory hurdles, and a thin investor base, November 2013 saw greater than $10 billion in issuance,” senior analyst David Preston said in a report published Wednesday.
The report said this pick up could be attributed to various factors: “We believe that underwriters and managers were incentivized to issue in 2013 based on aggressive budget targets. Second, managers may have initiated business plans, with lower fees on inaugural deals, which depend on continued issuance up to the proposed risk-retention deadline. Last, banks may have worked to clear warehouse capacity, especially as regulators increased scrutiny of leveraged loans.”
Preston said he based his $60 billion estimate for 2014 on the view that $15 billion a quarter is a sustainable number.