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Collateralized loan obligations: US CLO market reopens after 12-month hiatus

Leveraged loan rally makes new issuance viable again

The collateralized loan obligation market received a shot in the arm last month when the first deal in more than a year was completed. Citigroup underwrote a new $500 million collateralized loan obligation, called COA Tempus CLO Ltd, which will be managed by an affiliate of WCAS Fraser Sullivan Investment Management. The Tempus CLO consists of $220 million of refinanced loans and $280 million of newly syndicated loans, according to Standard & Poor’s.

"Until recently secondary pricing levels were so low and the resulting yields so high, you couldn’t viably look a company in the eye"

Russell Morrison, Babson Capital Management

One swallow doesn’t make a summer, but it’s a start. CLO investors have remained on the sidelines in the primary markets for the past year, while secondary markets have offered the best opportunities, as a rally in leveraged loan spreads returned them more than 60% through the year.

In terms of new issuance, 2009 saw the lowest volume in a decade, says Moody’s Investors Service, which rated $26.5 billion of CLOs, or 17 deals. Moreover, the majority were balance-sheet transactions designed to improve capital adequacy ratios for mainly European banks, which could then use them as collateral in repo agreements with the European Central Bank.

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