Improvements in economic and credit fundamentals will push European Collateral Loan Obligation (CLO) issuance towards €16-18bn in 2016, following a pushed-back issuance over the last 12 months.
Last year started off quite well, and early on it was forecast by some to be a €20bn issuance year – far exceeding the €14.2bn achieved in 2014. However, a variety of factors pulled the brakes on this, including the Greek economic crisis, the slowdown in Chinese GDP, ongoing Risk Retention regulations and lower Leveraged Loan issuance with volatile secondary market pricing.
As a result, warehouses have been taking longer than usual, and managers are preoccupied with finding the right approach to overcome risk retention, i.e. originator versus sponsor route. December closed with issuances sitting at €13.4bn – just 37% of the peaks reached in 2006 (at €36bn). Interestingly, 2014 was a record year for issuances in North America, which reached a high of $124bn beating the 2006 issuance of $97bn, but this fell to approximately $97/98bn in 2015.
According to my fellow panellists at the Opal CLO Summit in California, 2016 is expected in bring in between $60-70bn in issuances.As I discussed at the summit, my analysis shows nine new Euro CLO managers have entered the market since the revival started in 2013, of which three closed a CLO, and six are somewhere in their warehouse/incorporation stage.
Further analysis indicates that around 20 transactions are somewhere in their warehouse stages. And, another eleven entities have been set up, which will result in a stockpile of over 30 transactions for 2016. Taking into account that, all things equal, another 14/15 transactions will pop up and close during the year – I expect roughly 40/45 transactions and an issuance volume of €16-18bn.
Overall the outlook for this year seems more positive; credit and economic fundamentals are in a better shape, low defaults in combination with GDP growth in Euroland, as well as – hopefully – a pick up in the LBO, M&A and Public-to-Private feed for the Leveraged Loans supply for Managers and their CLOs.The Euro CLO market will remain small for 2016/2017; I believe that diversification will continue to be an issue for both managers and investors, due to small or limited eligible loans collateral.
The Euro CLOs market seems small, but it is for sure pretty.
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