Remember the days when securitised products were toxic, complicated and for the recklessly brave only? Another year of rising asset values later and the only members of the “10 per cent club” left are slices of equity on new issue collateralised loan obligations.
Morgan Stanley’s credit strategists have had their binoculars out and, which ever way you cut it, there simply aren’t big returns on offer in 2014. Except for high quality debt exposed to interest rate risk, the price of pretty much everything has gone up this year as yields have fallen.
Compare and contrast the Novembers of 2012 and 2013: Read more
The CLO kind of got off lightly in Fed governor Jeremy Stein’s “Overheating in credit markets” speech.
Makes sense, given what Stein was mostly talking about — places in the market where the yield chase could be relying on assets that in turn rely on short-term funding. In other words, leverage that turns “overheating” into a supernova. Read more
Back in December, the FT’s Tracy Alloway and Robin Wigglesworth explained how that which was financed by collateralised loan obligations was no longer going to be so financed. This will lead to a credit crunch for sub-investment grade companies that looks set to kick off in earnest in a couple of years.
Older CLOs* are making up for some of the slack by extending loans, but it appears that ultimately, funding will have to be obtained elsewhere or these companies will default. Read more
What would you think if this headline graced your inbox?
Managers triumph at credit event of the year Read more
In Part 1, FT Alphaville described what ‘synthetic securitisation’ deals done by Standard Chartered in the second half of 2011, looked like:
A month ago, FT Alphaville took a closer look at a particular transaction that Barclays completed in order to decrease the amount of regulatory capital it was required to hold against a portfolio of loans.
The transaction is called “synthetic securitisation”. The bank buys protection on the credit risk of part of its own loan portfolio, sold by outside investors. They transfer the risk but the loans themselves physically remain on Barclays’ balance sheet. Read more
European credit markets are bracing for more defaults as the bulk of collateralised loan obligations winds down in 2012 and 2013, the FT reports. Such CLOs have a finite life span after which they are not allowed to trade new loans for existing ones, or reinvest money received from repayments or interest on existing loans they hold. By the end of next year, the majority of CLOs will have gone “static”. By 2014, more than 98 per cent of European CLOs will have have a reached the same point, according to a report by Standard & Poor’s. This is expected to hurt the market’s ability to refinance an estimated €250bn of leveraged loans maturing in Europe between now and 2017, and removing a source of credit to the wider economy.
It’s like putting your foot on the accelerator but because the transmission mechanism isn’t working properly, the car wheels don’t respond.
Actually George, that might be because the car is on fire, and the wheels have blown off. Read more
A US bankruptcy court on Wednesday approved a deal to securitise loans from a $5.3bn portfolio made by the former investment bank Lehman Brothers, in a sign both of the quiet revival and the changed nature of the market for complex financial products, the FT reports. WCAS Fraser Sullivan is to take over management of the assets and will generate cash for creditors by selling a series of collateralised loan obligations – instruments that pool assets, which are then sliced into tranches of varying risk and return. The investment management firm expects to securitise at least $1bn of loans within the next year. In each sale, the Lehman estate will retain the equity tranche, the riskiest slice of a CLO first subject to any losses. The Lehman deal is “idiosyncratic”, said Steven Miller, managing director of S&P LCD, but “it is part of a broader pattern of consolidation”. The CLO industry has been consolidating since its heyday during the buy-out boom of 2006 and 2007, when new issuance totalled nearly $100bn in the two consecutive years. CLOs buy leveraged loans, which, along with junk bonds, are the main financing tools for leveraged buy-outs.
FT Alphaville noted last week that Citi analysts were predicting a return to the heady pre-crisis levels of leveraged buy-outs.
But, they argued, this time is kind of different: there will be fewer “mega-deals” (>$7bn) and the CLO business will be “a shadow of its former self.” Read more
All hail Standard Chartered’s new synthetic Collateralised Loan Obligation:
2 December 2010, Singapore – Standard Chartered Bank has completed its sixth Collateralised Loan Obligation (CLO), START VI CLO, under its multi-award winning START CLO programme. Read more
Structured finance world, rejoice. Banks too.
Early this week Standard & Poor’s announced a mass (and we mean mass) round of positive news for Collateralised Loan Obligations (CLOs) — those sliced and diced bundles of corporate loans. The rating agency put 415 tranches from 146 US corporate CLO deals on credit watch positive, because of improving corporate credit. Read more
The market for Collateralised Loan Obligations — those sliced and diced business loans — may have only just reopened, but boy, has it evolved!
News came on Tuesday that JP Morgan is revising the $400m CLO arranged for Apollo Management; reducing the triple A-rated tranche by $1.75m, and increasing the triple B-rated tranche by $4m. The reason, presumably, is investor demand for those riskier, higher-yielding, slices. The structure should now look like this: Read more
Whither all those rubbish European bank assets?
There are plenty of soured loans lingering in the system, on top of a €500bn-outstanding leveraged loan market still being shaken out. Read more
Is Bloomberg trying to tell us something about the ICO’s new €23bn CLO?
July 26 (Bloomberg) — Instituto de Credito Oficial, a Spanish government agency that lends to businesses, plans to issue 14.8 billion euros ($19.22 billion) of bonds backed by company loans . . . Amid the financial crisis, Spanish banks have put together asset-backed bond issues that they don’t sell, instead using them as collateral for European Central Bank loans. The nation’s banks borrowed a record 126.3 billion euros from the ECB in June, according to data compiled by the Bank of Spain. Read more
One of the engines behind the now bust buy-out boom has sputtered back to life, with investors buying a new collateralised loan obligation in the US market, the first to be launched in more than a year, the FT reported. Analysts are now predicting a modest recovery in the CLO market but volumes are likely to remain relatively muted, and the US market is likely to pick up before Europe’s.
When, in the spring of 2008, there came a sudden burst of CLO issuance, there was some speculation that the securitisations were being created to take advantage of a new Federal Reserve facility.
The Fed’s Primary Dealer Credit Facility, or PDCF, was initiated in March 2008, in response to troubles at Bear Stearns and the seizing-up of money markets. The facility let primary dealers, the Fed’s official trading partners, borrow from the central bank in return for posting investment-grade collateral. Read more
One more little piece of the Lehman puzzle.
Deus Ex Macchiato points us in the direction of Volume IV of the court-appointed Examiner’s report into the Lehman Brothers’ bankruptcy. Specifically, the bank’s use of the Federal Reserve’s Primary Dealer Credit Facility, or PDCF, something which has already been covered here and here. Read more
What Protium — Barclays $12bn credit asset sale — cannot achieve, reclassification can.
Out today — Barclays 2009 results. Read more
Earlier this month, FT Alphaville asked whether synthetic CLOs were gone for good, or merely hibernating?
This week it looks like the synthetic CLOs’ simpler cousin, your run-of-the-mill business loan-packed CLO, is beginning to awaken: Read more