CLO Sales Will Recover From Slow Start to Year, Citigroup Says

Sales of bonds backed by risky corporate loans in Europe may reach a nine-year high even after the worst start to a year since 2014, according to Citigroup Inc.

Issuance of collateralized loan obligations totaled 2.6 billion euros ($3 billion) in the first quarter, compared with 3.3 billion euros in the same period of 2015 and 2.5 billion euros in 2014, according to Citigroup. The U.S. lender said last year that issuance of CLOs will total 16 billion euros in 2016 up from about 15 billion euros last year.

Citigroup, together with Deutsche Bank AG and Morgan Stanley, identified Europe’s 58 billion-euro CLO market as one of the biggest sources of new debt for structured credit investors in 2016 as European Central Bank stimulus encourages demand for higher-yielding assets. Issuance has been suppressed this year as a rout in credit markets and collapsing commodity prices curbed demand for the debt and increased borrowing costs.

“The pace of CLO sales in the first quarter is much less than predicted,” said Ratul Roy, a Citigroup analyst in London. “We can still get close to 16 billion euros of issuance, but only if investor fears subside and CLO spreads tighten.”

The average extra yield investors demand to hold senior portions of CLOs has increased 12 basis points this year to 165 basis points, according to Citigroup. That’s about 30 basis points more than a year earlier.

JPMorgan Chase & Co. forecasts new CLO issuance of 15 billion euros this year.

The increase in yield premiums has eroded the profit CLO managers get from buying loans and repackaging them into bonds, said Roy. They will typically only issue the notes when income from the underlying loans surpasses what they pay out on the CLOs.

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