US CLOs revive as loan markets surge
The collateralized loan obligation market has been one of the surprise recovery stories of the past year. US managers are reappraising the opportunities it provides. Will the revival continue, and can it catch on in Europe? Joti Mangat reports.
STABILIZING DEFAULT RATES, tightening credit spreads and improving investor confidence have all underpinned the rally in the loan markets this year. They have also spurred a remarkable renaissance in the US CLO market.
The market’s largest CLO manager, Babson Capital Management, says the structure has proved its mettle. "To varying degrees global investors are going to look back through the historical lens and ask how did this asset class perform versus similar types of risk. These structures did just about everything they were expected to. With the passage of time people can go back and see the benefits, and this is driving increased appetite for CLOs," says Russ Morrison, managing director and head of high-yield investing at the firm.
The sector’s performance
The sector’s performance over the past year has been stellar and might yet still have room to run. Although de-risking by global investors in the wake of the Japan disaster has unwound some of this year’s rally (especially at the double-B and triple-B level), triple-A paper maintained its gains and most market observers maintain their medium-term buy call on the market.