U.S. CLO issuance slows in April; Europe CLO primary hindered in 2013 but forecast to grow

By Cristal Cody

Tupelo, Miss., May 2 - New collateralized loan obligation issuance slowed in April from the previous month to $3.9 billion, only 34% of the $11.2 billion volume in March, Dave Preston, senior analyst at Wells Fargo Securities LLC, said in a research note on Thursday.

"We believe the primary market slowdown is due to a combination of uncertainty about the FDIC assessment, a forward shift in issuance schedules and a tightening loan market," he said. "Certainly, we think issuers and all investors, but bank investors, are probing to find the effect of the new regulations and to find new pricing levels. Some AAA buyers may have temporarily paused as they sort through the new rules."

The Federal Deposit Insurance Corp. implemented new rules for calculating deposit insurance assessments for large institutions on April 1 that require CLOs to be treated as higher-risk assets.

The primary market also may have slowed because the "large uptick in CLO issuance in March most likely pulled demand forward as managers may have slightly shifted issuance calendars to beat the April 1 deadline," Preston said. "The lack of net new supply in the loan market and the tightening of loan spreads combine to present a more challenging environment for new-issue CLOs."

Europe CLO market

Limited loan availability is expected to hinder CLO issuance in Europe this year but leveraged loan availability will increase after 2013, Moody's Investors Service said in a CLO market research note.

"Origination of new leveraged loans is unlikely to be strong this year," Moody's said. "A number of factors have prevented companies from issuing leveraged loans in Europe, thereby limiting investment opportunities for new CLOs. Primary leveraged loan issuance, leveraged buy-outs, and mergers and acquisitions, the main sources of leveraged loans for CLOs, have been few in Europe in recent years."

However, corporate refinancing needs are expected to rise over the next two years, Moody's said.

"Some of that refinancing will likely come from new CLOs with larger pools of bonds, particularly secured bonds, than in the past," the agency said. "Because the reinvestment periods of 84% of existing CLOs by number will end by December 2013, loans that existing CLOs would otherwise have bought will become available. Furthermore, as existing CLOs delever, those CLOs can redeem and sell their loan portfolios, which will become available to new CLOs."

Investor demand in Europe for CLOs so far remains light compared to the U.S. market, and uncertainties on Article 122a, which requires CLO transaction sponsors, whether the manager or a third party, to retain a 5% interest in the deal have hindered issuance, Moody's said.

"Signs that investor demand is changing are emerging," according to the note. "The CLO issuance boom in the U.S. in 2012 and recent CLO issuance in Europe suggest that the primary CLO market could resume in Europe, where it has been dormant since 2008, but not without overcoming hurdles."

Cairn CLO III BV priced the first post-crisis European CLO in February with a €300.5 million deal, followed by the €300 million offering from Dryden XXVII Euro CLO 2013 BV and ALME Loan Funding 2013-1 Ltd.'s €325 million transaction in April.

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