CDOs

The $71.7 billion-asset manager is replacing notes from a 2015-vintage CLO that had been squeezed on asset quality prior to its October 2017 post-reinvestment period.

The $52 billion in year-to-date volume in resets of collateralized loan obligations is nearly outpacing new-paper issuance of $53.5 billion, reports LPC.

The new notes are not being distributed proportionally across the capital stack, however; instead the refinancing will result in slightly higher subordination for the senior, triple-A-rated Class A notes.

Changes that federal regulators are contemplating to the Volcker Rule could pave the way for CLOs to resume investing in high yield bonds, which they currently cannot do without putting themselves off limits to banks.

The volume of "true" new-issue CLOs (excluding reissued deals of existing collateralized loan portfolios) have declined for four consecutive months after February's high-water 2018 mark of $14.7 billion. But JPMorgan maintains its $115 billion-$130 billion annualized forecast.

Exempting CLOs from “skin in the game” rules allows managers to unload more of the risk in these transaction; increasingly, they are doing this by issuing a second tranche of speculative- grade notes.

Default risks in retail and media leveraged loans have also risen to the forefront of CLO manager concerns, which a few years ago were centered on oil and gas exposure.

Despite concerns about credit quality, the only constraints on new issuance appear to be the supply of loan collateral and the capacity of warehouse facilities and rating agencies.

Issuance is strong and defaults remain low; yet CLO market participants are concerned about heavy debt loads of the companies they invest in, as well as the lack of investor protections.

Sean Solis has been a partner at Dechert since 2014, advising collateralized loan obligation managers and arrangers through the hoops on U.S. and European risk-retention regulations.