Citigroup Sees Slow Leveraged-Loan Growth Stunting European CLOs

Slow growth of leveraged loans in Europe next year will stunt the market for securities that package them into tradable assets, according to Citigroup Inc.

Issuance of collateralized loan obligations will total 16 billion euros ($17 billion) in 2016, from about 15 billion euros this year, Citigroup analyst Ratul Roy said in a Nov. 25 report. JPMorgan Chase & Co. strategists Rishad Ahluwalia and Jacob Kurosaki expect “muted” new issuance of 15 billion euros this year after a shortage of leveraged loans contributed to slower sales in 2015.

It will be a “hard year for CLOs.” London-based Roy said in the Citigroup report. “Loan collateral shortage caps our 2016 forecast.”

Sales of leveraged-loans, which underpin CLOs, have slowed as private equity firms struggle to find targets for buyouts because of competition from the initial public offering market and cash-rich companies. Investors are drawn to the higher yields of Europe’s CLOs as European Central Bank stimulus measures suppress premiums in the rest of the region’s securitization market.

CLOs were deemed among the most appealing securities for investors in both the new-issue and secondary market, according to a JPMorgan survey conducted over the week of Nov. 16.

The average extra yield investors demand to hold senior tranches of CLOs instead of benchmark interest rates is 155 basis points, JPMorgan data show. That’s more than the 101 basis points available on similar-ranking debt backed by Italian mortgages and eligible for purchase by the ECB, the data show.

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