Although registration was up this year for IMN’s 22nd Annual ABS East conference held at the Fontainebleau Miami Beach earlier this month, attendance was lower than it’s been in previous years as many industry participants decided against attending due to concerns about the recent Zika outbreak in Miami. The CLO sector, however, continued to be well represented and the consensus of the conference attendees was that CLOs have a very positive future ahead.
In past ABS East conferences, 25% to 30% of the delegates have been associated with the CLO market. This year that percentage was even higher as professionals associated with CLOs represented the largest number of attendees by asset class – overtaking MBS and consumer loan ABS. In fact, the organizers moved the CLO programing to its own separate venue at the Nobu Eden Roc Hotel (next door to the Fontainebleau) this year in order to accommodate a more robust CLO focused schedule.
Participants at the conference were overwhelmingly optimistic about the state of the CLO market. Even though 2016 started out slowly, individuals on several panels reiterated that they expected to see upwards of $60 Billion of CLO issuance in the United States this year. Panelists also predicted that the market will see a similar figure in 2017.
Investments in the upper portion of the capital stack garnered particular attention at the conference this year with several panels noting that pricing continues to improve in both the primary and secondary markets for triple-A and mezzanine CLO notes. Panelists cited this as the main reason CLOs remain an attractive investment especially when compared to other asset classes including high-yield bonds and MBS. In fact, one complaint expressed by panelists on Tuesday’s AAA Investors Panel was that many smaller investors in triple-A notes are now being shut out of deals in the primary market because of large players dominating those offerings. This just goes to demonstrate the overall desire for CLO paper in the market and how demand continues to be exceedingly strong.
Although, the recent move by Prophet Capital was fresh on the mind of several panelists on Tuesday’s Equity Investors’ Panel, they nevertheless indicated that equity investments in CLO remain attractive, especially with the ability to secure deal specific advantages through negotiating rights in the documentation of each CLO. Prophet recently called the Covenant Credit Partners CLO I while there was still two years left in its reinvestment period. While allowed by the CLO Indenture, other investors in the deal were surprised and hit with a loss. As a result several individuals on the panel stressed that any investor taking minority equity positions in a CLO, whether in the primary or secondary markets, needs to do his/her due diligence and know exactly who is holding the majority position. They noted investors should also review the Indenture of any CLO they are looking to invest in and discuss the specifics of that CLO with their legal counsel in order to determine anything that may have an adverse effect on their investment.
Finally, the discussions around CLO asset managers continued to be focused on risk retention compliance. Panelists on Monday’s CLO Industry Outlook, which included Dechert’s Cindy Williams, acknowledged the unpleasant reality that risk retention will ultimately reduce the number of CLO managers. The general consensus was that the market will likely only be able to support around 50 active managers in the future. During the CLO Manager Roundtable which was moderated by Dechert’s John Timperio, the participants discussed the various solutions that managers have available to them including setting up CMVs and CMOAs to comply with the impending risk retention rules. The panel discussed what their firms had done to address risk retention and suggested to the audience that the solution for each manager would ultimately be based on each manager’s individual situations and needs. Bret Leas of Apollo, one of the panelists, gave some of the best advice of the entire conference in response to a question of how to plan for risk retention compliance – “the first thing you do,” he said, “is hire Dechert.”