The second annual IMN CLO and Leveraged Loan Conference returned to New York this past week. Building on last year’s momentum (discussed here), over 1,500 managers and investors, in addition to structurers, bankers, lawyers and other industry actors, filled the convention space at the Conrad Hotel, doubling last year’s attendance and causing standing room only conditions in the large downtown venue. Yes, many conference attendees were literally prevented by conference staff from entering the fully packed Conrad ballrooms.
Dechert Partner John Timperio once again moderated a panel on the legal and structural considerations in effectively analyzing a CLO, particularly the comparison of the improvements made in the current CLO 2.0 structure in relation to the pre-2007 vintages (typically referred to as CLO 1.0).
CLO issuance has been exceedingly strong this year with north of $29 billion of CLO securities issued in the first quarter of 2013 alone (roughly half of 2012’s total), though industry participants attending the conference were divided on what to expect over the remaining three quarters. At the low end were predictions that 2013 will end up matching 2012 with issuance in the $55 to $60 billion range due to the limited supply of leveraged loans available in the marketplace. However, the general consensus was that CLO issuance will likely not continue on the prolific pace set in the first quarter but will still likely top $80 billion by the end of the year which would make 2013 one of the busiest years on record for CLO security issuance.
There are, however, significant hurdles to overcome if the more bullish of these prognostications are to come to fruition. For example, senior tranche investors have been resisting any further tightening of spreads on such top rated tranches and the FDIC rules that recently became effective (discussed here and here) have given certain of those senior investors leverage to try and push spreads wider or, alternatively, have caused such investors to put on hold any further investment in CLO notes until the effect of the FDIC rules can be further analyzed. Moreover, the most active rating agency in the CLO space, Standard & Poor’s, has recently announced it will be increasing the requirements necessary to earn the coveted “AAA” rating for such senior CLO tranches. Finally, the CLO market as a whole continues its discussions with regulators over implementation of the risk retention rules under Dodd-Frank as it has become clear that there will be no general exemption for CLOs.
In the face of these headwinds, everyone at the conference seemed to agree that CLO collateral managers will continue to require a steady supply of quality credits at attractive spreads to continue to put together transactions that make economic sense in this market environment.
However, optimism abounds as many within the CLO market are betting that these challenges in the structured credit market, as well as those in the wider economy, will not inhibit investor appetite for the yield available on CLO notes. We did not meet any conference commentator that expects a contraction in CLO issuance relative to 2012’s stellar performance.
By: Ralph Mazzeo, John Bumgarner, and Sean Solis