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CLO 'fear factor' to lift this year, say ABS heads

By Matthew Scully
10 Jun 2014

Bankers and investors at IMN's Global ABS conference, which returned to its "spiritual home" in Barcelona on Tuesday, are hopeful that the collateralised loan obligation product — one letter removed from the infamous CDO — will overcome its 'fear factor' this year and inspire unprecedented levels of demand.

Investors should expect a wave of new entrants to splash into the market for European CLOs this year as the industry works its way around the US's Volcker Rule, which put a stranglehold on new issuance in the first quarter, and new risk retention requirements in Europe.

“CLOs are cheaper than even sovereign paper and it’s a very attractive instrument that will become more attractive over time,” said Huub Mourits, global managing director at TMF Group Netherlands, in a panel at Global ABS.

The ongoing global search for yield in a historically low rate environment has investors flocking to the CLOs, which are paying out relatively more than other types of bonds.

This demand could help CLOs rise above the tarnished reputation of CDOs which has instilled fear among investors.

“There is still a fear factor for CLOs though,” said Mourits. “It’s a three letter [security] and ends with an ‘O’. It’s still close in name to the CDO.”

While some European investors have recently begun looking towards the US, where CLOs are seen as offering better value, US CLO managers have also begun structuring their deals to comply with European risk retention requirements in the hope of broadening their appeal.

First timers

CLOs count for as much as one quarter of all paper available in Europe and market conditions are leading non-CLO investors to wade in for the first time, said Orestis Millas, director at Morgan Stanley in London.

In a live poll during the CLO panel, more than one third of several hundred attendees predicted that three or more new issuers would hit the European market this year. Two thirds agreed the market would see between one and three new entrants, with demand weighted towards the most established CLO issuers.

“There is investor appetite in the bond market for the most risky names,” said Ian Perrin, vice president and senior credit officer for Moody’s Investors Services in Europe.

Moody’s assigned its lowest investment grade rating or below to all CLO securities it saw in 2013. That is up from 12% of its CLO ratings in 2012, Perrin said.

By Matthew Scully
10 Jun 2014