Panellists at the session on Monday told the audience there would likely be an uptick of European investors entering the market when the US finalises rules making US securitizations fully complaint under existing EU law.
US CLO managers able to present deals to investors that are risk retention compliant in both the US and EU are likely to have a far broader investor base to choose from, panellists said.
Some recent deals have struggled to sell as buyers of the most senior, triple-A rated tranches have backed out of the market. Finding new investors remains the great challenge for the sector in 2016.
Participants said quantitative easing outside the US could also attract new investors to the market.
“QE in Europe and in Asia should drive overseas demand, and the deadline in the US should allow more European investors to invest in US CLOs,” said David Preston, CLO analyst at Wells Fargo.
The collapse of global energy markets has strained the leveraged loan and CLO sectors, but some panellists shrugged off fears that the stress would significantly damage CLO investors.
“It’s clear that one of the most important things about CLOs is how diversified they are, but even more importantly how actively managed they are, both when they are put together when the manager selects the portfolio and on an ongoing basis,” said Matt Natcharian, managing director and head of structured credit investment at Babson.
Natcharian added, that as an investor, it was important to focus on individual managers and individual deals rather than looking at the market exposure to troubled sectors as a whole.
“When you see stress in the sector like this, you really begin to see the differences in the deals. Also when you look at CLO 2.0 in total, which is what a lot of people focus on in the statistics, you lose sight of some of the differences,” he said.
He said Babson had undertaken a detailed analysis of 253 CLO 2.0s from 52 managers. Natcharian said that the company had cast a broad net when looking at energy exposure, including oil, metal and mining, steel and some select utilities.
“When you look at the exposure by manager, it averages about 8.6% per deal per manager, and there are eight managers that are well over a standard deviation from that average and five managers that are below a standard deviation from that,” he said.
“The highest [exposure to energy] is at about 22% and by about number 3 on the list it’s at 15%. The lowest companies have exposure of 2% and there is exposure in every slot in between, so you can scale it from 2% to 22%.”
Natcharian’s comments are similar to a report issued by Moody’s earlier this month that highlighted the need to look at energy more broadly when assessing CLO exposure to energy. The rating agency added that the overall credit quality for US CLOs had dropped given the turmoil in the energy markets.
Default risk remains top of the agenda for CLO market observers, with one market source telling GlobalCapital earlier this month that CLO exposure to distressed assets was gradually starting to erode some investors' confidence in the market.
But panellists were optimistic about the market, despite several gloomy headlines about the sector through the first few weeks of 2016.
Primary issuance remains low and the consensus on the panel was that any market revival would likely be led by the secondary market, which has had a resurgence of trading as spreads have continued to widen throughout the year.