The collateralized loan obligation market was up about 80% in 2006 as compared with 2005 and it doesn't look as if it will slow down any time soon. Especially hot was the middle market, where a number of firms moved in to take advantage of greater spreads.
"Sheer volume is the story," Bill May, managing director at Moody's Investors Service, said. "I don't see any slowdown in CLO growth yet. It may very well come, but there is no evidence of it in terms of deals to be rated. I expect volume to remain quite high in the new year." As of the end of November, Moody's had rated 142 CLOs and was expected to rate around 175-180 by the year end. It rated 97 for the entire year of 2005.
A number of multi-billion dollar buyouts and companies selling off divisions have helped issuance in the loan market, fueling CLOs. "As long as the new deal pipeline is as robust as it has been this year and credit conditions are pretty favorable, I think the CLO market will do well next year," said Howard Tiffen, managing director at Van Kampen.
The middle market is also expected to continue to be a hot area. May said middle-market CLOs were up 100% this year. There have been a lot of new entrants into the market looking for better spreads and less competition than in the leveraged loan market. New entrants include Commercial Industrial Finance Corp. (CIFC) and Churchill Financial, which bought Centre Pacific now renamed as Churchill Pacific Asset Management that is expected to do a middle-market CLO next year. In November, Les Lieberman, who helped form Indosuez Capital, started up Porticoes Finance, which will focus on financing for middle-market companies.
"I think we are going to see more issuance and more managers," said Alla Zaydman, an analyst at Fitch Ratings in its credit products group. "There are a couple of managers coming online at the end of this year that will be a bit more active next year." Because the managers are not yet active she declined to name them.
Managers not rushing to the middle market are rushing to Europe. The flow of American firms overseas has not slowed from the 2005 pace. A JPMorgan report anticipates "a more globalized European CLO market with increased relative size and greater non-European manager and investor participation." The report says JPMorgan expects European CLO issuance to climb even more dramatically as the market continues to develop and as earlier transactions start refinancing.
Resource Europe Management, a Resource America business, is currently warehousing its first European CLO expected to price in the first quarter of 2007. Aladdin Capital Management also went to Europe in 2006 opening Aladdin Capital Management (UK) and is also expected to do its first European CLO next year. AIG Global Investment Group priced its first CLO, Euro-Galaxy CLO 2006-1, over the summer.