CLO primary slow to start, issuance should stay ‘robust’; U.S. managers look to Europe

By Cristal Cody

Tupelo, Miss., Jan. 9 – CLO issuance remains off to a slow start in 2015 with activity expected to kick off later in the month, but the primary market should be healthy in the near term, according to market sources on Friday.

“While much has been made of the start of the countdown to U.S. risk retention, we think concerns that U.S. CLO creation could decline significantly in 2015 are overblown,” Barclays analysts said in a report. “Instead, we believe the increasingly favorable economics for CLO equity should support robust CLO issuance as reduced competition from retail buyers for loan collateral keeps U.S. loan spreads at generous levels.”

Barclays forecasts U.S. CLO issuance in 2015 at $100 billion to $120 billion, while other market analysts have anticipated issuance to top out at $100 billion for the year based on risk retention requirements.

Federal agencies published the final rule to implement the CLO credit risk provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the Federal Register on Dec. 24, which started the two-year countdown to compliance.

CLO managers will be required to retain a 5% slice of deals starting Dec. 24, 2016.

U.S. CLO issuance rose to more than $132 billion and euro-denominated issuance reached €21.6 billion in 2014, according to data compiled by Prospect News.

U.S. CLO managers are expected to look to the European market in 2015, which should help euro-denominated issuance climb up to €25 billion, according to the Barclays report.

“A number of existing U.S. CLO managers are expected to launch their first European CLO 2.0 deals in 2015, enticed by Europe’s tighter liability spreads,” the analysts said.

Vintage CLO performance eyed

The CLO market in the meantime is focused on worst performing vintage CLOs and costs of debt, Wells Fargo Securities senior analyst Dave Preston and associate analyst Jason McNeilis said in a note on Friday.

The vintage fourth-quarter 2011 and third-quarter 2012 CLO equity “are the worst performing post-crisis quarterly vintages thus far, as those deals had a higher cost of debt and were issued prior to periods of loan spread tightening,” the analysts said.

In addition, fourth-quarter 2014 CLOs “have the highest average cost of debt of any post-2011 cohort,” according to the Wells Fargo note.

© 2015 Prospect News.
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