A robust economy and rising issuer demand for financing is expected to drive an increase in corporate bond issuance and collateralized debt obligations this year, according to an annual survey of members of the Bond Market Association.
Corporate bond issuance is expected to rise 1.6% to $719 billion in 2006. Respondents expect the highest growth to be in high yield. Median high-yield issuance is forecasted to be $98 billion this year, a 30% increase over 2005.
Growth is expected to be particularly strong in the CDO sector. The median forecast has cash CDO issuance at $173 billion in 2006, an 8.8% increase over the estimated $159 billion issued in 2005. Leveraged loans are expected to be the largest volume cash CDO collateral at $63 billion in issuance, up 12.5% from 2005, and accounting for nearly 40% of total cash issuance.
Michael Decker, senior v.p. and head of policy and research at the association, said more banks are expected to repackage loans into collateralized loan obligations. "Banks are expanding lending activity to satisfy the demand of companies which choose to borrow through banks. To the extent that banks are ramping up lending activity, some loans are finding their way into CLOs," said Decker.
The survey also found that members expect weaker credits to suffer as investors show less demand for yield. The growth in CDOs and CLOs is partly driven by investors seeking higher credit quality. "There is a trend among some groups of institutional investors that are looking to improve the credit quality of their portfolios," said Decker.