On January 24 in New York City, Global Capital hosted a CLO roundtable to discuss the world of new risks and regulations. Read selected excerpts from the roundtable below. For complete roundtable coverage, download the PDF.
Risk retention is finally here, but the rule is practically old news for the CLO market. Given that managers have had two years to prepare their compliance models, market players are focused on new set of challenges and risk factors on the horizon.
The price of leveraged loans in an ongoing impediment to the new issue market, with the potential to significantly eat into issuance totals. Meanwhile, esets and refinancings continue to thrive under the auspices of the Security and Exchange Commission’s “Crescent Letter”. Against this backdrop, credit concerns are deepening. Certain sectors, such as energy and healthcare, continue to show signs of stress, while other sectors like retail are also wavering. Despite all this, a handful of managers have successfully forged ahead to issue new deals at spreads that are at cyclical tights. Market concerns aside, investor demand for CLOs appears to be insatiable.
Outside of technical factors, the CLO space, like the rest of the world, is coming to terms with a new government in Washington, DC. How the new administration’s policies will effect US credit is a topic of great interest, particularly in healthcare where the repeal of the Affordable Care Act is likely to have far reaching implications. Tough talk from President Donald Trump on drug pricing is also raising eyebrows in the debt markets, and after a flurry of headlines around Valent Pharmaceuticals — the largest single company exposure in the CLO universe — loan managers will need to keep a close eye on the sector.
Navigating the market in this new era will certainly pose its challenges. GlobalCapital gathered a panel of experts from across the market, including issuers, arrangers, investors, legal experts and rating agency analysts, to discuss what CLO players can expect in a time of immense change.
Global Capital (GC): The obvious starting point is risk retention. Now that it is finally with us, how is the market reacting to the rule?
Medita Vucic (MV): I would say that we have seen consolidation from the trustee perspective. I also see new entrants coming into the market and where we see an opportunity for usis new managers emerging needing to create operational efficiencies. I would say that depending on whether you choose a [capitalised manager vehicle], [manager owned affiliate] or [capitalised manager owned affiliate], there are different reporting needs for collateral managers, lenders and investors. A collateral manager can gain efficiency by selecting one service provider for its risk retention solution, which can include fund administration, accounting, trustee and collateral administration services. We are seeing a trend where investors can be influencing whether a collateral manager utilizes one or many service providers for risk retention.
GC: How can CLO managers differentiate themselves in 2017?
MV: I would say standardization can be a differentiator, however, investors will look at performance. The help measure performance, data and the availability of data is important.
GC: Leveraged loan pricing has been another big theme, and how the repricing of leveraged loans is impacting CLOs. What are your thoughts here as 2017 gets underway?
MV: The possibility for regulation being rolled back and the credit cycle impact in healthcare are wildcards. So do CLO managers diversify their credits and look at the assets they are buying as a result of these wildcards?
GC: Asian investors were big players in the CLO market in 2016. But with the new administration’s potentially hostile trade policies, is there likely to be an impact on the Asian investor base?
MV: Data and transparency of data is what we are focusing on as the demand for it in real time is here.
I think the market is going to a point where there is more daily compliance reporting. We are working on delivering the information in various formats including electronically through our online compliance reporting system, LoanArc which will provide compliance tests and loan data. We are also looking at ways that we can help managers benchmark performance of CLOs.
GC: To wrap up, what are your CLO primary issuance projections for 2017?
MV: Right now, I think the range is $50bn-$70bn, probably would say somewhere right in the middle.