LSTA panel: CLO future remains uncertain, banks could return to market

By Andrea Heisinger

New York, Oct. 29 - There haven't been many collateralized loan obligations in the recent past, but they may make a resurgence, panelists said at the Loan Syndication and Trading Association conference on Thursday in New York City.

"There are rumors of a revival in the CLO market," said the panel moderator Meredith Coffey, of the LSTA. "We haven't really seen any since 2007."

In order for that to happen, CLO AAA spreads need to come back in, she said.

In the spring of 2009, CCC rated holdings were highly damaging to CLOs, suffering high levels of defaults, said panelist David Preston of Wells Fargo Securities.

Other damage came from the refinancing cliff going down $45 billion within six months, Coffey said. The majority of that came from defaults.

As far as the secondary loan market is concerned, Coffey asked panelists if there would be a pullback, and if it would be good or bad if it happened.

"It depends on the path of the new issues," said Matthew Miller, managing director of bank loans at TCW. "If there are a lot more, it would be a negative impact on the secondary market. Current investors are not thrilled by a pullback. Future ones could be scared away."

There have been only a few so-called "amends and extends" in the market that have helped borrowers avoid a default, said David Frey of Stanfield.

"Amend/extend is a very elegant solution," he said. "The negatives are the average life and final maturity limitations. [We're] fairly selective on which loans to do it on. We're not willing to do three-year [loans]. Two years is reasonable. There's just too much uncertainty beyond that."

The panelists were not entirely certain when a new CLO issue would happen.

The acceptable amount of leverage is much lower than in the past, said panelist Sean Griffin of JPMorgan Chase. There is a smaller CLO market, he said, and a restraint on the AAA investor base.

"If we get to $25 billion [in new CLOs in 2010] we'll be very happy."

Frey weighed in that he was shocked at the dramatic change in the sentiment in the last six months.

"The Reynolds $1 billion term loan is something I wouldn't have foreseen."

Banks could make a return to the CLO market, said Griffin of JPMorgan. The comeback could be "to soak up new AAA they feel will be available," he said.

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