CLO capacity this year will keep declining as existing CLOs reach the end of their reinvestment periods and there are few signs that many of these CLOs will be able to reinvest post reinvestment periods, according to Thomson Reuters LPC, which tracks the loan market.
Issuance of collateralized loan obligations finished 2011 at about $12.8 billion, up from roughly $4 billion in the previous year, LPC reported. At nearly $13 billion, 2011’s CLO issuance figure sits squarely in the middle of market expectations of $10 billion to $15 billion for the year.
Market participants are expecting a modest pickup of $15 billion to $20 billion in issuance for 2012. But because reinvestment periods are ending, credit capacity could become constrained. CLOs typically invest in bank loans and other forms of corporate finance, providing capital for primary lenders to make new loans.
The reduction in CLO capacity could be somewhat ameliorated as a result of Moody’s rating methodology update, which began in June, and has resulted in an average upgrade of just over three notches for 85 percent of outstanding U.S. CLO tranches.
While upgrades were recorded for a majority of CLO tranches originally rated Aaa, almost 70 percent of tranches originally rated Baa1 to Baa3 are now below investment grade. Meanwhile, managers are focused on ways to deal with maturity limits, including supporting “amend and extend” activity.
(Ioana Barza is a vice president at Thomson Reuters LPC.)