While leveraged loan ETF and money market funds face an unsteady near-term future amidst ongoing retail investor outflow, the CLO market is rolling towards its busiest year ever.  With year-to-date global issuance at approximately $98 billion (with $89 billion or so in the U.S. alone) as of mid-September, many market commentators see $125 billion in total U.S. CLO issuance by year-end as a real possibility.  Recent reports calculate that CLOs accounted for nearly 60% of new issue institutional leveraged loan demand in the first half of 2014.  As new collateral managers continue to enter the market and the industry has recovered from the Volcker Rule chill of mid-winter, market actors are now preparing to deal with the challenges that the forthcoming U.S. risk retention rules will inevitably present.

With all of the above news dominating the CLO headlines, some market observers may have missed a less heralded development in the CLO market, which is very likely to have an impact on both the CLO market and the leveraged loan market.  On August 1, 2014, S&P released an updated CLO rating methodology that provides for a more nuanced classification of recovery assumptions related to the assets acquired by CLOs.  The challenges and opportunities presented by the updated S&P methodology are worthy of attention.
Continue Reading CLO Market Update: S&P Recovery Ratings, More’s the Merrier