CLO volumes show life left in structured credit

Investment banks successfully sold around $6.5bn (€4.7bn) of corporate collateralised loan obligations last month, proving there is still demand for structured credit products that part bundle leveraged loans despite broad market volatility.


The sale of CLOs, which with hedge funds have been one of the chief buyers of leveraged loans backing private equity buyouts, is a small triumph for a market that has been one of the worst hit by the tumult since June.

Institutional buyers of CLOs have drastically cut back their exposure to the instruments over the last three months amid the turmoil and growing concerns over the quality of the leveraged loans underwritten by banks.

Analysts estimate that there is a $300bn pipeline of leveraged loans in the US that banks have not been able to sell down or syndicate as a result of the plunge in demand from institutional investors, especially CLO funds.

CLOs are sophisticated instruments that pool senior and subordinated loans ahead of being securitised, repackaged and sold on to new investors as bonds backed with the same collateral but with varying risk profiles.

In the last three years at least, managers of CLO funds, such as Alcentra and Babson Capital in London, and hedge funds have dominated the leveraged loan investor base to the detriment of the share of the market once held by banks.

One leveraged finance banker, said: “The return of the CLO bid for leveraged loans is probably the most important element to getting the backlog of financings done.”

Deutsche Bank said in a report today that CLO volumes in August are still below the monthly average level of $7.4bn so far this year, but the sales represent a significant increase from July’s below-average volume of $3.3bn.

In the year to date, some $60bn of corporate CLOs have been sold on the market, an increase of 3.5% on volumes in the same period the year before, according to Thomson Financial.

However, spreads or risk premiums across CLO tranches have risen or widened out as buyers remain reluctant to increase their exposure, Deutsche Bank said in the report.

It added the volume of leveraged loans being underwritten had slowed considerably over the past two months with August volumes hitting $740m – down from $18bn in July and an average of $47bn per month in the first six months of the year.

Anthony Thompson, research analyst at Deutsche Bank in New York, said: “CLO secondary demand has been tainted by the problems of CDOs of asset-backed securities."

He added: "As long as investors continue to lump CDOs of ABS and CLOs together as products with similar risk profile, negative headlines surrounding the former will continue to negatively affect confidence in the CLO product.”