- First half was busiest six months ever
- 98 CLOs nearly matched full-year 2012 total
- Risk retention rules a cloud over industry
With $47 billion of issuance during the first six months of the year, 2013 has witnessed the biggest half year for issuance ever, Appleby reported in a semi-annual report. And the 98 individual CLOs in the first half nearly matched the full year of 2012, when 115 CLOs came to market. Ultimately much of that money ends up invested in leveraged loans, resulting in cheaper money for sponsors to do deals.
Julian Black, global head of structured finance for Appleby in the Cayman Islands, told Buyouts that issuance has roughly tripled every year since 2009, at the nadir of the financial crisis, when only three CLOs came to market.
Demand is being driven by investors hungry for yield that cannot achieve the returns they desire through more conventional debt instruments, Black said. The U.S. Federal Reserve and other central banks have used unconventional techniques for the past several years to drive long-term rates lower in an effort to boost economic activity.
CLOs — packages of syndicated loan participations that are stratified according to their risk characteristics — benefit investors because of their diversification, Black said. “I don’t think any CLO saw any problematic credit losses during the financial crisis.”
“Other segments of the securitization market have not come back,” he noted. Mortgage-backed securities and collateralized debt obligations, which bundle retail consumer loans, are among the categories that remain moribund, he said.
If there is a cloud over the asset class, it is the chance that U.S. regulators could impose risk retention rules on CLO managers, requiring them to have “skin in the game” by holding some of their own pooled loans as a way to discourage excessive risk-taking. “Only a small number of managers would be able to operate in such an environment,” the firm noted in its report.
Organizations such as the Loan Syndications and Trading Association have been active in trying to beat back those rule changes to protect the vitality of the syndication business. Sister service Thomson Reuters Loan Pricing Corp. has reported that 40 percent of leveraged loans, such as those used to finance buyout transactions, end up in CLOs.
But much of the issuance is coming from deep-pocketed managers, including Ares Management, Credit Suisse Asset Management, Oaktree Capital and Blackstone GSO Capital Partners (see table) that might well be able to afford to continue operations even given the higher costs of complying with the risk retention rules. Black said that of Appleby’s 31 collateral management clients, two-thirds of the firm’s deals come from the top 10 managers.