CLO Issuance Increases to $83.1 Billion in Busiest Pace

Sales of debt that pool together high-yield, high-risk loans reached $83.1 billion, surpassing the amount issued in all of 2013 and heading for a possible record, according to Morgan Stanley data.

Silvermine Capital Management LLC arranged an $879.1 million collateralized loan obligation yesterday, putting 2014 issuance on track to exceed the record $93 billion created in 2007, according to Royal Bank of Scotland Group Plc and Bloomberg data. JPMorgan Chase & Co. and Wells Fargo & Co. predict as much as $100 billion may be completed this year.

The boom is helping fuel demand for high-yield loans, a market U.S. regulators have said shows signs of froth. Some managers are rushing to issue CLOs ahead of the release of rules that will require firms to hold onto pieces of the deals they sell, which may cut issuance by $250 billion.

“Managers have a lot of incentive to get as many CLOs done before risk retention and I think the supply keeps spreads from tightening so investors will continue to buy,” Dave Preston, a CLO analyst at Wells Fargo in Charlotte, North Carolina, said in a telephone interview.

Volume has been robust even after regulations tempered issuance in January following the December release of the Volcker Rule that will prohibit banks from buying the debt of funds that own bonds.

Issuance Jumps

There were $2.6 billion of transactions arranged in the U.S. in January, according to RBS data. Issuance jumped to $9.4 billion in February after deals were created that either eliminated the ability to buy bonds or included the option only if there is a regulatory change in the future.

With one regulation worked out, some managers are now rushing to issue deals before the release of another. Risk-retention rules, which, if enacted as proposed, would require managers to hold onto 5 percent of the debt they package or sell, are expected to be released this year.

Once enacted, the new rules may slow CLO sales by as much as $250 billion, according to a Loan Syndications and Trading Association-sponsored study conducted by New York-based consulting firm Oliver Wyman.

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in March 2013 updated leveraged-lending guidance, saying debt levels of more than six times earnings before interest, taxes, depreciation and amortization “raises concerns.” Underwriting should also consider a borrower’s ability to pay down debt to a sustainable level within a “reasonable period,” they said.

Silvermine Deal

Silvermine raised the $879.1 million deal with Citigroup Inc., its third of the year, according to a person with knowledge of the fund who asked not to be identified because terms are private.

Rich Kurth, a Silvermine co-founder, declined to comment about the transaction.

CLOs, which are often used to finance leveraged buyouts, buy loans and slice them into securities of varying risk and return. Last quarter, the funds bought 63 percent of new loans, according to the LSTA, which cited Standard & Poor’s Capital IQ Leveraged Commentary and Data.

“As we are awaiting the final risk-retention rules, issuers have been highly motivated to get deals done,” said Oliver Wriedt, co-president of CIFC Corp. in New York, which oversees about $12.6 billion.

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