- JPMorgan, BofA lower expectations as yield premiums lag behind
- Issuance has totaled just 2.5 billion euros since Aug. 1
Banks are lowering estimates for 2015 sales of collateralized loan obligations in Europe as a slump in issuance derails what was expected to be the busiest year since the financial crisis.
JPMorgan Chase & Co. and Deutsche Bank AG both now expect sales of CLOs to decline versus last year because other securitized assets offer higher yield premiums. CLOs, the biggest buyers of leveraged loans, are also under pressure from slower issuance of the underlying loans and looming rule changes that are damping demand at insurers and banks, the traditional buyers of the top-ranking portions of the debt.
“This was supposed to be a blow-out year,” said Cameron Saylor, a London-based partner at law firm Ashurst LLP, who focuses on structured finance. “It’s as if the Christmas break has come early.”
Just 2.5 billion euros ($2.7 billion) of CLOs have been sold in Europe since the beginning of August, versus 9.5 billion euros in the first seven months of the year, according to data compiled by Bloomberg. Many of the 20 or more CLOs being prepared for sale may also be delayed until next year, said Rondeep Barua, a Bank of America Corp. analyst.
Deutsche Bank has lowered its full-year CLO issuance estimate to no more than 13 billion euros from 15 billion euros. JPMorgan analyst Rishad Ahluwalia, who had forecast 20 billion euros, now says sales may not surpass last year’s 14.4 billion euros.
The biggest reason for the slowdown is “a lack of demand at the AAA level, as well as the premium available in other assets,” Ahluwalia said.
Bank of America’s Barua has cut his forecast to 15 billion euros from 18 billion euros, which would be a slight year-on-year increase to 15 billion euros.
Yield premiums on senior notes backed by non-conforming mortgages in the U.K. have surged 54 basis points this year to 161 basis points above benchmark interest rates, amid speculation that the government’s pending sale of home loans from failed lender Northern Rock Plc will lead to a flood of new mortgage bonds. The average extra yield on senior tranches of CLOs has only climbed 18 basis points this year to 150 basis points, based on JPMorgan data.
Signs of a slowdown are also emerging in the larger U.S. CLO market, where Barclays Plc expects sales to decline to as low as $70 billion next year from more than $95 billion this year. Issuance totaled $124 billion last year, according to Wells Fargo & Co.
Leveraged loans in Europe fell to 32.6 billion euros in the first 10 months of the year, down from 44.9 billion euros a year earlier, according to Deutsche Bank. CLOs, which helped finance some of the biggest leveraged buyouts in history during the last credit boom, repackage risky corporate loans into securities with ratings as high as AAA.
The number of investors willing and able to buy senior notes, typically the largest portion of CLOs, has declined because insurers and banks are preparing for tougher capital rules covering securitized debt.
“There are few natural buyers for AAAs in Europe,” said Denis Struc, a senior analyst at Henderson Global Investors in London, which oversees 82 billion pounds ($124 billion). This low demand “has really come to the fore in the latter part of this year.”