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December 13, 2012 7:16 pm
Issuance of collateralised loan obligations, investment vehicles specialising in corporate debt that came close to extinction in the credit crisis, has surged past $50bn in the US this year, far outstripping expectations.
Several large deals this week, including a $415m sale by Trimaran Advisers and a first-time issue by boutique firm DFG Investment Advisers, took the total issuance to $50.5bn, according to S&P.
CLOs are being touted as one of the last places to find outsize yields in an era of ultra-low interest rates, and even the riskiest pieces of the deals are finding ready buyers, market participants say.
This year’s issuance is four times last year’s level, and the best since 2007. The peak year was 2006, when $97.0bn was raised. The resurgence has re-established CLOs as a major source of demand for leveraged loans, floating rate debt on companies such as those owned by private equity firms.
CLOs are similar to other securitisation vehicles, in that they issue multiple tranches of debt, including some with a triple A rating, whose investors will have first claim on cash flows from the underlying loans.
The equity portion, which only makes returns when the debtholders have been paid, has been in strong demand this year despite being the riskiest part of the capital structure.
Mike Kessler, credit strategist at Barclays, said that demand for the equity tranche was coming from private equity and business development companies, European pension funds, and an increasing number of dedicated CLO investment funds.
“There are more sources of equity demand out there because more investors are sufficiently confident in the CLO structure to take the riskiest part,” Mr Kessler said. “We have seen a gradual process whereby market participants who had stepped away are slowly coming back and becoming more comfortable with specific managers and more confident in the health of the market.”
The situation in the US is in marked contrast to that in Europe, where there has been no new CLO issuance since the financial crisis.
Leveraged loans for purchase by CLOs are in shorter supply in Europe because of the weakness of the banking system. Also, the European Union introduced rules mandating that CLO issuers keep a portion of the underlying loans on their own books, changing the economics for issuers.
RBS is predicting that the surge in issuance is yet to peak, and that next year could see $60bn-$65bn of new deals coming to market in the US, and at tighter prices that reflect the strong investor interest. “With investors hungry for yield, CLO spreads in the secondary market tightened throughout the capital stack, with robust demand for mezzanine notes and equity,” in 2012, analysts Richard Hill and Kenneth Kroszner wrote.
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