Euro CLO issuances to match 2016, driven by refinancings

Last year’s €16bn raised in CLOs is expected to be equalled this year as AAA liability spreads continue to tighten.

Issuance within the European collateralised loan obligation (CLO) market is expected to reach around the same level as 2016 – driven largely by a number of refinancings across the continent.

Last year, the market reached approximately €16 billion of issuance, according to Bloomberg data, and that’s expected to be repeated this year with Q1 having seen €4 billion issued, according to S&P.

Refinancing and resetting activity are driving much of the supply within CLO vehicles as managers continue to hunt for newly originated loans to fill up offerings. At the moment they are diminishing in supply, said attendants at the Global ABS conference in Barcelona.

Matthias Neugebauer, managing director at Fitch, noted that CLO triple A liability spreads dropping to 80 bps, from around 140/150 bps six months ago, means there should be an increase in the number of CLOs being raised overall this year. However, he said that “the main issue for managers is finding collateral”.

CLO managers expect a further tightening of triple A spreads as more investors and new managers continue to enter the space and European default rates continue to remain low, hovering around the 2 percent mark.

The chief issue is a lack of supply of loans. “Refinancings on the loan side have become more aggressive,” Neugebauer said.

Increasingly, CLO vehicles are taking on more risk as cov-lite transactions become the norm at the larger end of the market, although one panellist noted that one £250 million loan was completed without any lender protections.

“Cov-lite is here to stay,” said David Matson, managing director at IKB Fund Management. He added this is not necessarily the most accurate measurement of the riskiness of a deal.

Echoing Matson, Barry Lane, director at Investcorp Credit Management, said: “Covenants don’t make a loan a good deal. What matters is the underlying credit quality.”

Despite further tightening of spreads, investors continue to enter the CLO space as other debt instruments struggle offer the same value.

Recent improvements in transparency since the global financial crisis have enabled institutions to better compare performance among managers, said one participant, although there remains the barrier of a lack of standardised definitions on terms.

Many complained that regulatory regimes across the world continue to diverge regarding guidelines on hot topics such as risk retention, making a fully functional global securitisation market a distant possibility.