2013 Recap: No Stopping Momentum for CLO Market

No other structure or asset class has signaled the return of securitization to the mainstream investor markets more than Collateralized Loan Obligations. 

During the darkest days of the post-Credit Crisis through the end of 2012, when the markets continued to struggle in so many areas, it was the CLO market that continued to perform.  One could argue that this asset class has almost single-handedly lifted the confidence of all sides of the issuance market (investors, issuers and arrangers, alike) in structured finance over the last three years.

Heading into 2014 and off a relatively strong if not historically significant, US$50Billion in issuance for 2012, leading market prognosticators expected new issuance for 2013 to be something in the US$60-70Billion range.  However, it didn’t take too long for the experts to re-forecast as that 2012 level was exceeded before we got through the summer.  The latest projections suggest that the market should exceed US$75Billion before we reach the end of this month, a full 50% increase over 2012 levels.

All this good news despite the presence of some strong headwinds; most notably in the form of CLO Manager Risk Retention Requirements in the Euro zone and the negotiations around the final form of the Volcker Rule in the U.S.  The risk retention rule has its own issues, as in its worst form it could significantly reduce the number of managers that would choose to be active and thereby, the potential to reduce the number of new programs and slow demand for new loan origination from European lenders.  However, it was the potential harm to the investor side of the marketplace that has been creating the biggest stir, as the new proprietary trading restrictions (the “Volcker Rule”) could have had the effect of chasing a large cross-section of the CLO investor base to the sidelines.

While good news related to the Euro retention rules remains elusive, this past week brought an announcement that the final version of the Volcker Rule, while not perfect, will keep the banks in as investors.  The imperfect parts of the final rule, has the banks precluded from buying into CLO’s that also include bonds and other “non-loan” collateral (which many existing programs do) and the Rule does not provide for any grandfather status to programs issued prior to the implementation date of July 2015.  Nevertheless, this final version of Volcker is much better than some expected and another strong validation for the recovery of the securitization markets.

Assuming that the news on Volcker only gets better and there is a rationale resolution to the Euro retention standards, it may be very possible for new issuance levels of CLO’s in 2014 to grow yet another 50%, perhaps exceeding US$110Billion by this time next year, which would represent a historic high for this asset class which topped out in 2007 when some US$92Billion was issued.