Seven of our colleagues in Dechert’s active CLO group represented the firm at the first annual IMN CLO and Leveraged Loan Conference in New York a few weeks ago. Strong interest in the collateralized loan obligation technology meant a capacity crowd of more than 750 managers, arrangers and investors, often leaving panel discussions with standing room only.
As participants reviewed CLO performance over the past five years, the theme emerged that CLOs weathered the crisis well compared to other structured finance vehicles. The CLO technology performed as advertised: protecting senior investors and amortizing senior notes during periods when coverage tests triggered.
Dechert Partner John Timperio moderated a panel on legal and structural considerations covering improvements in CLO 2.0 as compared to CLO 1.0 of the pre-crisis 2007 vintage. The consensus was that refinements to the CLO 1.0 technology (already proven during the crisis) will mean a CLO 2.0 that is even more resistant to stress featuring more conservative capital structures, cleaner commercial loan portfolios, stricter collateral quality tests and shorter reinvestment periods. Hand in hand with the technological refinements, greater collateral manager transparency and investor engagement are increasingly important.
CLO 2.0 has been going great guns with north of $5 billion issued in the first quarter of 2012. All this good news is of course tempered by the challenges posed by Dodd-Frank and its progeny, notably the Volker Rule (discussed here), the risk retention rule (discussed in this Dechert OnPoint) and the conflict of interest rule (discussed in this Dechert OnPoint). As regulators struggle to formulate appropriate rules and market participants struggle to educate the regulators, we hope that the baby isn’t thrown out with the bathwater.
Still, the mood was optimism that issuance in 2012 at least will continue apace, which confidence looks well placed as, since the conference, total CLOs pricing for the year has hit $9.78 billion, as counted by the LSTA.
This is great news for 2012, but as the various rules come online, where will the baby be next year (or the year after)?
By: Matthew Ginsburg and John Bumgarner