Morgan Stanley Joins JPMorgan in Raising ’14 CLO Forecast

Concern that regulatory scrutiny will curb the market for collateralized loan obligations may have been overblown.

Morgan Stanley raised its forecast for new CLOs in the U.S. this year to as much as $85 billion, at least the third bank since April to boost projections for the biggest buyers of junk loans. JPMorgan Chase & Co. boosted its projection to as much as $100 billion on May 2, while Wells Fargo & Co. lifted it to as high as $90 billion last month.

CLO issuance is accelerating after concern regulatory attention would damp new formation of the funds, which provide financing to speculative-grade companies. The Volcker Rule, adopted in December as part of the financial overhaul mandated by the Dodd-Frank Act, prohibits banks from investing in a CLO that owns bonds.

“The new issue market has shrugged off this year’s slow start, as well as the potential regulatory headwinds from the Volcker rule,” Morgan Stanley analysts Vishwanath Tirupattur and Mia Qian wrote in a research note today.

A total $12.3 billion of broadly syndicated U.S. CLOs were formed last month, the highest monthly volume since the financial crisis, bringing total issuance this year through April to $31.7 billion as the investor base expanded, according to the report.

Wells Fargo raised its forecast to what would potentially be the most in seven years, according to an April 1 research note. JPMorgan increased its projections to $90 billion to $100 billion from $60 billion to $70 billion, according to a May 2 research note.

Resurging Issuance

Morgan Stanley revised its forecast to $75 billion to $85 billion of CLOs, from previous projections for $55 billion to $65 billion, according to the research note.

Issuance of CLOs collapsed to $20.6 billion in 2008, the year Lehman Brothers Holdings Inc. failed, from a record $104.7 billion in 2007, according to Wells Fargo. Last year’s issuance totaled $82.6 billion.

CLOs were the biggest buyers of new high-yield loans last quarter, with about 55 percent of the primary market, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data.

Companies have raised $223 billion of U.S. loans this year from institutional investors such as CLOs and mutual funds, after a record $686 billion in 2013, according to data compiled by Bloomberg.

Junk loans are rated below Baa3 by Moody’s Investors Service and below BBB- at S&P.

Prices of the debt have climbed this week to 98.47 cents on the dollar yesterday, the highest level since February, according to the S&P/LSTA U.S. Leveraged Loan 100 index.

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