Out of crisis comes opportunity. The crisis has been the pandemic which gave CLOs the chance to demonstrate their resilience as a product and led to $1.2tr of US government infrastructure spending to stimulate the recovery as well as the likelihood of higher interest rates. In the US CLO market the opportunity is the chance of a more diverse range of products with the addition of project finance CLOs.
The perception that the market has reached the long period of low interest rates has swelled investor appetite for floating rate products like CLOs.
Last year, the US CLO machine demonstrated its power, smashing issuance records with $150-$160bn in deals. The volume surpassed the previous peak of $120bn-$130bn established in 2018.
Project finance CLOs, which will bundle up a new wave of loans that fund US infrastructure, will allow managers and arrangers have more freedom to vary the diet in the broadly syndicated loan (BSL) CLO market in an effort to keep up with demand.
Project finance CLOs have been tipped for take-off before but it has never materialised.
But last year, two deals appeared from Starwood Property Trust, the first US issuer of a CLO backed by a portfolio of project finance and infrastructure loans. The issuer has deals in pipeline in 2022.
The firm has in advantage compared to other managers as Starwood Infrastructure Finance, the energy infrastructure arm of the firm, focuses on direct origination of high quality, first lien, senior secured project finance and corporate infrastructure loans.
Market participants believe that the time is right for innovation in the CLO market. Demand is high, with the product having proved resilient during the pandemic, and will remain high if interest rates rise.
A growing pool of CLO investors is willing to bet on different products to diversify their portfolios in what has been tipped to be another banner year for issuance volumes.
Project finance CLOs will offer a premium over more established BSL deals and the $1.2tr infrastructure bill will provide further impetus to supply the market.
Data to support the case for the growth of the asset class is thin on the ground but Deustche Bank and MUFG, which both worked on Starwood's project finance CLO deals, are convinced that it is here to stay.
But the product is still at a nascent stage and appears to be split between pure project finance CLOs and infrastructure CLOs, which are based on broadly syndicated corporate loans focused on infrastructure, and hybrids of the two.
The asset class may well remain esoteric to many investors. The time it will take for rating agencies and investors to get to grips with it could well delay it from becoming a mainstream product.
But the conditions are ripe for the product to gain a foothold and so to paraphrase the famous line from the movie Field of Dreams that could well apply to the infrastructure being funded itself, if you build, it they will come.