CLO’s Breaking Out

There is much good news in the markets these last few weeks about the resurgence of the Collateralized Loan Obligation market and it seems that any potentially bad news resulting from the SEC’s recently proposed risk retention rule is not dampening that enthusiasm.

One might conclude that most industry participants are expecting that once the regulators realize the potentially negative and perhaps unintended impact of the newly proposed skin-in-the-game rules on non-mortgage asset structures, they will make the proper adjustments (“clarifications”) to the rule.  We would agree with this assessment.

So, with optimism abounding, we see the results of Citigroup’s survey of attendees at the bank’s recent Structured Credit Conference indicating that a majority of the investors survey expect to increase their holdings of  primary CLO’s and nearly half indicated their intentions to increase their secondary CLO holdings. 

We don’t find this surprising as more and more stories about how well “pre-crisis” CLO’s have performed including a recent story about how some of the “old” Lehman Bros. CLO’s are producing annualized returns exceeding 50%.  The S&P/LSTA Leveraged Loan Index is up by more that 17% since October 2009.

No wonder that Bloomberg reports that  BlackRock, Inc.  is currently working with Citigroup in sourcing $400mm for a new CLO program and many other banks and asset managers are considering the possibilities associated with a strong resurgence in this asset class.

About markferraris
Managing Principal Orchard Street Partners LLC

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