The supply and demand imbalance in leveraged loans has increased investor concern that collateralized loan obligations are all chasing the same collateral. This would create problems for buyers of CLOs trying to create diversified portfolios. But according to a J.P. Morgan study, issuer overlap is much less than anticipated and overlap is not increasing over time as an increasingly large pool of CLOs look to invest in the market.
Some overlap is expected, as the U.S. leveraged loan market has only $150 billion outstanding, a sixth the size of the high-yield bond market. J.P. Morgan found though that CLO collateral pool overlap is 22%, whereas an informal poll conducted by the J.P. Morgan CDO desk expected overlap to be closer to 50%. However, the analysis did not include CLOs from the same manager, which according to a J.P. Morgan analyst would be expected to have higher overlap. This is important as many buyers of CLO paper are comfortable investing with the same managers.
The report also found there are large concentrations in a small number of names. The top 1% of names comprising 11 issuers, account for 10% of total collateral and the top 4% of names comprising 39 names account for 25% of total collateral. Not surprisingly, the most common names included Charter Communications and Dex Media loans.
The report looked at deals from 2000-2003 selecting three deals from each year. The managers were Allstate, The Carlyle Group, Eaton Vance Corp., Babson Capital Management,Blackstone Debt Advisors, Harborview Asset Management, Credit Suisse Asset Management, Katonah Capital Management, Ares Management, Invesco, Deerfield Capital Management and GoldenTree Asset Management.