Collateralized debt obligations backed by loans overtook deals backed by bonds in the first quarter, according to a report from Banc of America Securities last week. The report validates what market players have been saying, as investors have become increasingly interested in the loan asset class. "We expect loans to outpace bonds, but we expect the ratio to lessen over time," saidLang Gibson, analyst at Banc of America. Gibson said the cause for the loan pop relates directly to an investor base more interested in high-yield loan collateral than bond collateral.
Gibson pointed out that investor interest in loans versus bonds is related to the asset class' historical outperformance of CBOs as measured by CDO rating migration statistics and CDO indices of collateral performance. The current ratio of loan deals to bond deals is approximately 4.5 to 1. Gibson expects the ratio of loan deals to bond deals to decrease, but he expects the loan deals to still exceed the level of bond deals for the year. Gibson attributes the possibility of a stronger future CBO pipeline to the fact that CBOs issued in the second quarter of 2000 benefit from substantially wider collateral spreads, which are largely discounting past defaults. In addition, both deal and manager quality have improved significantly over time in response to investor demand.