Wells Fargo expects Issuance of collateralized loan obligations is to moderate in 2015, to $90 billion.
That would be shy of this year’s pace, which has already set a record at $105 billion through October, according to Thomson Reuters. Issuance is widely expected to reach as much as $125 billion for the year as a whole.
Still, $90 billion would beat the $80 billion printed in 2013, marking the second strongest year since the financial crisis. Analysts at Wells Fargo expect that issuance will be driven by managers’ desire to grow their assets before rules requiring them to keep skin in the game’ take effect in 2016.
With some $50 billion of CLOs expected to run off or be refinanced, net issuance for 2015 would be between $40 billion to $50 million.
In a report published Tuesday, analysts said that an “ambitious” primary calendar should limit spread tightening, as supply matches demand. “The CLO market has trained’ CLO investors to outwait issuers with the reward of higher spreads,” the report states.
As of Nov. 14, the average triple-A tranches of CLOs issued this year with a weighted average life of 5-6 years was 160 basis points over Libor, according to Wells Fargo. That was seven basis points wider on the month.
There is one potential catalyst for tightening in spreads on the triple-A rated tranches of U.S. CLOs: If European regulators provide some clarity on how to put deals in compliance with that risk retention rules in that region, there could be increased demand on the part of European investors for U.S. deals.