The primary market for collateralized loan obligations could see $15-25 billion in new-issue deals this year, according to panelists at the CLO Sector Review session at ASF2012 Monday. “I know of six to eight transactions being marketed right now, to close in the first quarter of 2012,” said Sajid Zaidi, executive director and head of CLO structuring at Morgan Stanley. “I’m confident we’ll see $2.5-3 billion in issuance in the first quarter, absent any game-changing moves from Europe.”
U.S. CLOs are cheap relative to other structured products, and with $12.5 billion in issuance from 28 CLOs last year—more than three times what the primary market saw in 2010—things look to be on the right track, according to Justin Pauley, CLO strategist at the Royal Bank of Scotland. “The CLO structure works, and they’re preforming better now than they did before the crisis,” Pauley said. He pointed to Moody’s Investors Service upgrading 2,867 CLO tranches between June and November of 2011 due to changes in its ratings methodology, and Standard & Poor’s similarly upgrading hundreds of CLO classes on performance improvements.
“The bottom of the capital structure is where a significant amount of value lies now, as the world starts to come back online to a risk-on posture,” Morgan Stanley’s Zaidi said, referencing BBBS pricing in the range of LIBOR plus 650-675 basis points and selling at prices in the high 80s, and BBs pricing 5-7 bps richer now than they were just two months ago.
To get the CLO space to grow apace of healthy performance statistics, it’s all about earning back the trust of the buyer, the panelists said. “For one we need to see a broader investor base, and we’re certainly seeing that today,” Pauley said, gesturing to the audience for the conference break-out session, which was standing room only.
Moderator Sara Bonesteel, managing director, head of alternative investments at Prudential Fixed Income, pointed out that with many existing CLOs running into the end of their reinvestment periods, total outstanding CLOs will begin to run off in fairly short order, and that collateral doesn’t always get reloaded or redeployed back into CLOs.
But increasingly, those investors aren’t simply walking away, according to Zaidi. “We’ve seen a lot of propensity from certain investors—Japanese banks being one of them—wanting to be involved in the deal that’s replacing [the deals rolling off]. On the equity front, we’re seeing a number of U.S. and European pension accounts, and I expect them to be a much bigger player going forward in 2012,” according to Zaidi.
Lawrence Beller, director at PNC, told the group that an uptick in third-party equity investors can pick up the slack for some of the typical investors who are not in a position to participate in a large slice of the transaction.