CLO primary market quiets ahead of holiday weekend; tighter CLO liability spreads eyed

By Rebecca Melvin

New York, July 2 – The primary market for collateralized loan obligations was quiet on Thursday as the ranks of market players thinned ahead of the three-day holiday weekend in observance of July 4.

CLO issuance for the year to date is about par compared to last year’s first half, standing at about $78 billion, according to Prospect News’ data.

Wells Fargo Securities says the pace is slightly behind 2014’s rate but ahead of 2013’s rate. At the end of June, the bank reiterated its forecast for $90 billion of CLO issuance for full-year 2015.

Collateral sourcing continues to be a challenge for CLO managers. In recent weeks, institutional loan issuance saw an uptick from the depressed levels of the first part of the year. Loan issuance in the first five months of the year was less than 60% of the total for the same period of 2014. But much of the uptick has been the result of refinancings. So far this year, institutional loan issuance stands at about $141 billion.

Meanwhile, CLOs issued in the third quarter are expected to have tighter liability spreads than those issued in the fourth quarter of 2014 and the first quarter of 2015 and may face less asset tightening as they will be issued after a pickup in loan refinancings, Wells Fargo Securities analysts said.

Loan fundamentals have stabilized in the past nine months, but are still worse than the more investor-friendly times of 2011 to 2012.

While the regulatory environment has produced a positive effect for loan investors, overall leverage figures are below the peak of October 2014, according to the analysts.

Retail loan investors appear to invest in loan funds as a rate hedge, or at least invest in loans when forecasts are calling for higher rates, the analysts David Preston and Mackenzie Miller wrote in a recent note.

“We see a relationship between retail fund flows and interest rate expectations,” the analysts wrote. If retail investors believe a rate hike is imminent, they may increase allocations to loans.

Beginning this month, dealers will face restrictions in owning senior notes issued before 2014 under the Volcker Rule that is taking effect, and it will likely create a significant squeeze on liquidity, according to Wells Fargo Securities analysts.

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