Back From The Dead: U.S. Collateralized Loan Obligations (CLO) Market Revival

Includes: BAC, C, CG, CS, JPM, KKR, WFC
by: Maani Value Guru

The market for the U.S. collateralized loan obligations (CLO) was truly reborn last year. For all of 2012, CLO volume was $54 billion, a five-year high, and a more than fourfold increase from the 2011 volume of $12.5 billion.

That's a giant leap for a market that produced just $15 billion of new vehicles during the extremely lean years of 2008-2010. In those years, as a result of the subprime mortgage crisis, the demand for lending money either in the form of mortgage bonds or CLOs almost grounded to a halt. Many declared CLOs/structured finance dead during the financial market meltdown of 2008-09.

CLO volume as of November 2012:

The reason behind the creation of CLOs was to increase the supply of willing business lenders, so as to lower the price (interest costs) of loans to businesses and to allow banks more often to immediately sell loans to external investor/lenders so as to facilitate the lending of money to business clients and earn fees with little to no risk to themselves. CLOs accomplish this through a 'tranche' structure. Instead of a regular lending situation where a lender can earn a fixed interest rate but be at risk for a loss if the business does not repay the loan, CLOs combine multiple loans but don't transmit the loan payments equally to the CLO owners.

Instead, the owners are divided into different classes, called "tranches". By pooling multiple loans and dividing them into tranches, in effect multiple loans are created, with relatively safe ones being paid lower interest rates (designed to appeal to conservative investors), and higher risk ones appealing to higher risk investors (by offering a higher interest rate). The whole point is to lower the cost of money to businesses by increasing the supply of lenders (attracting both conservative and risk taking lenders).

As 2013 gets underway, analysts predict issuances of $60 billion to $70 billion of new, regular-way arbitrage deals this year. That would put the CLO volume closer to the peak of $92.8 billion set in Pre-Credit Crisis era of 2006/07.

Another consequence of 2012's more robust CLO market was, clearly, the growing number of managers able to ink new deals. All told, 60 managers printed a CLO in 2012. That's the most since 2007, up from 28 last year.

The size of individual CLO deals has been on the rise too. In 2013 so far, the average size of the 16 CLO vehicles that had printed as of Jan. 24 was roughly $542 million, up from an average of $474 million in the fourth quarter of 2012.

Looking ahead, participants are generally optimistic about CLO issuance. JP Morgan CDO analyst Rishad Ahluwalia forecasts that volume will climb to $70-80 billion next year, while Brad Rogoff of Barclays puts the figure at $60-75 billion.

Credit Suisse Asset Management's $832 million CLO is the largest so far this year. Details of that CSAM deal, and select others from 2012-2013:

Columbia Management $415M CLO via Citigroup (C)

The transaction is structured as follows:

The deal has a four-year reinvestment period.

GSO/BS $515M CLO via J.P. Morgan (JPM)

The transaction is structured as follows:

The 11-year deal has a two-year non-call period and a four-year reinvestment period.

Symphony $827.5M CLO via Bank of America Merrill Lynch (BAC)

The transaction is structured as follows:

CSAM $832M CLO via Credit Suisse (NYSE:CS)

The CLO, which is the largest deal to price in the year to date, is structured as follows:

Madison Capital $327M CLO via Wells Fargo (NYSE:WFC)

The transaction is structured as follows:

The deal has a two-year non-call period and a three-year reinvestment period.

Carlyle (NASDAQ:CG) $605M CLO via Citi

The transaction is structured as follows:

The 12-year deal has a four-year reinvestment period.

KKR (NYSE:KKR) $412M CLO via Citi

The transaction is structured as follows:

The 12-year deal has a four-year reinvestment period.

* all data sourced from S&P and LCD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.