By Marianne Nardone
Panelists at today's Lessons Learned in the CLO Market and the Way Forward session will discuss the emerging role of the rating agencies, and how the collateralized loan obligation market has struggled and evolved from the downturn in the last few years.
Alexander Rekeda, managing director and head of CDOs for Guggenheim Capital Markets in New York, said the panel will discuss how the market has shifted in its view toward the rating agencies, particularly in the last five years. Rekeda said buyers of CLOs have learned the importance of relying on their own analysis, as opposed to looking solely toward the rating agencies for due diligence on investments. "Everybody likes to blame the rating agencies, including me, but every investor knows they should do the work on their own and not just rely on rating agencies, even for triple-A or double-A investments," Rekeda said.
The panel will exchange views on whether the CLO market has reached the bottom, particularly since prices have been on an upward swing since February, and will talk about the overall economy and the recession's effects on CLOs. Rekeda noted that most deals coming to the market are "plain vanilla, with no hidden cash traps," and that buyers and sellers have matured in their understanding of the basic risks. Still, Rekeda noted that people are making money in this market. "Everything is going up. Everyone is buying everything, and the market has deepened," he said. "People are not stupid, they understand it better." Panelists added that while the CLO market has rallied, there has not been much new issuance--which may be the case for the remainder of the year.
Moderator Andrew Cormack, London-based CLO manager with Santander Global Banking & Markets, together with Alegra Capital CEO Daniel Riediker and Jerry Donohue, head of non-investment grade at Channel Capital, will exchange views on the technical aspects of the market and how it has matured in the last few years. Topics include minimum arbitrage, purchase price, and some of the negative effects that the rating agencies had particularly on trading of Triple C tranches. The panelists are at this point reluctant, however, to commit to whether the CLO market specifically has reached the bottom, but will share views on this.
Rekeda said rating agency constraints often pushed prices even of high-quality leveraged loans to levels that would scuttle the deal. "While they had the best intentions, the constraints have not always led to the best outcome. While it may have been much safer and designed to keep deals intact, the deal often collapsed and volume went down," he said. He added that the gradual movement away from relying just on the rating agencies has improved this greatly in recent months.
Lastly, the panel, with members hailing from various European countries as well as the U.S., will talk about where the greatest number of investors is emerging in terms of geography. Rekeda said he views the U.S. as rallying the most, with Europe lagging. Panelists agreed that the bulk of investors who did not understand the market have vacated the niche, leaving buyers who fully understand the structured credit market as the main investors. Rekeda expects the high-yield market in the U.S. to continue to drive prices up, as investors searching for 15% yields continue to find value in the CLO market.