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CLOInterest Summary - January 2015 Edition

Core Content

This edition of CLOInterest provides an overview of the CLO market in the US, Europe, and globally, focusing on manager performance, market trends, and the impact of macroeconomic and regulatory factors on the market.

Main Points

• CLO Manager Landscape:

  • The top 10 US CLO managers' share of the market fell from 34% to 30% in 2014, while the top 10 European managers still represented about 50% of their market.
  • CLO 2.0 structures are becoming more prevalent, with 58% more US CLO 2.0s outstanding than CLO 1.0s as of 31 December 2014.
  • The US risk-retention rule is expected to reshape the manager landscape by encouraging consolidation in 2015.
  • In the US, CSAM leads in AUM with $13.1 billion, while CIFC leads in number of deals with 32 CLOs.
  • In Europe, GSO/Blackstone leads in both deal count and AUM, managing 15 deals totaling €4.5 billion.
  • Globally, Carlyle leads in both deal count and AUM, with 37 CLOs totaling $15.8 billion.

• Market Activity:

  • 2014 saw record CLO issuance, with $110 billion in the US and €12.8 billion in Europe.
  • There were 98 managers issuing new CLOs in 2014, compared to 81 in 2013.
  • The number of CLO managers in the US increased from 133 in 2013 to 143 in 2014.
  • Eleven first-time managers closed 21 deals totaling $8.5 billion in 2014.

• Deflation Risks and Corporate Credit Outlook:

  • The expected 3.3% global economic growth for 2015 is below the 4.8% average from 2003-2007.
  • Deflation risks are a concern, especially if price deflation spreads beyond oil.
  • Moody's expects a mild rise in the US high-yield default rate in 2015, from 1.9% to 2.1% in Q2-2015 and potentially to 2.5% in the three-months-ended November 2015.
  • The EDF/NAI model suggests that high-yield bond spreads are too wide and that profits are likely to grow if capacity utilization increases.

• Impact of Oil Price Drops:

  • The steep drop in oil prices had limited impact on CLOs due to small oil and gas exposures.
  • European CLOs have even smaller exposures because most speculative-grade O&G companies are US-based.

• Volcker Rule Impact:

  • A House bill would delay the Volcker Rule conformance date for pre-31 January 2014 CLOs from July 2017 to July 2019.
  • The amendment allows CLOs to retain bank investors by providing additional time to amend terms for compliance.
  • It removes a credit-positive provision that would have excluded CLO debtholders' voting rights from being considered "ownership interests."

• Key Data:

  • US CLOs had $339 billion in outstanding par as of 31 December 2014, up 22% from 2013.
  • The US high-yield bond spread is projected to narrow from 554 bp to a range of 425 bp to 475 bp in 2015.
  • A strong correlation (0.77) exists between the annual growth rate of industrial capacity utilization and profits from current production.

Key Information

• Manager Performance:

  • US CLO Manager League Tables (By Number of Deals): CIFC (32), Carlyle (26), CSAM (21), GSO/Blackstone (21), Highland (21), CVC (20), Apollo (20), Voya (19), Ares (17), Babson (16).
  • US CLO Manager League Tables (By AUM): CSAM ($13.1 billion), CIFC ($12.4 billion), Apollo ($11.4 billion), Highland ($11.3 billion), Ares ($11.0 billion), GSO/Blackstone ($10.0 billion), CVC ($7.5 billion), MJX ($7.5 billion), Voya ($7.9 billion), Octagon ($7.8 billion).
  • European CLO Manager League Tables: GSO/Blackstone (15 deals, €4.5 billion), Alcentra (13 deals, €4.4 billion), Carlyle (11 deals, €4.0 billion), ICG (10 deals, €2.4 billion), Avoca (9 deals, €2.4 billion), 3i Debt (8 deals, €2.4 billion), Babson (8 deals, €2.3 billion), BNP Paribas (8 deals, €2.0 billion), Pramerica (8 deals, €2.0 billion), Ares (7 deals, €1.7 billion).

• Market Trends:

  • The US CLO market saw a significant increase in the number of CLO 2.0 deals, with 486 CLO 2.0s totaling $235 billion as of 31 December 2014.
  • Medium-sized managers (those with five to nine deals) accounted for 36% of new issuance in 2014, up from 18% in 2013.
  • The share of new issuance from the top 10 managers by deal count declined to 18% in 2014 from 25% in 2013.

• Regulatory Impact:

  • The Volcker Rule extension allows pre-31 January 2014 CLOs to retain bank investors for an additional two years.
  • The bill’s current form is uncertain, with the White House threatening to veto it.

• Economic Outlook:

  • Global economic growth is expected to be weak in 2015, with China's growth projected at 6.9%, down from its 10.2% average in the 2003-2007 period.
  • Low inflation and deflation risks are expected to keep US benchmark borrowing costs low.
  • Industrial production growth is projected to be slower than previously anticipated, increasing the risk of lower profits and capacity utilization.

Conclusion

The CLO market in 2014 saw record issuance and a shift towards CLO 2.0 structures, with increased participation from medium-sized managers. The US and European markets showed different trends, with the US market more fragmented and the European market dominated by a few large managers. The Volcker Rule extension is expected to have a significant impact on the US CLO 2.0 market, allowing more time for compliance. The 2015 outlook for corporate credit remains cautiously optimistic, with deflation risks and weak economic growth as key concerns.