Partner Robert Robinson at Sidley Austin and Evan Tepper, a vice president and analyst at Moody’s Investors Service, took the floor at the American Securitization Forum Conference to discuss the dynamics of collateralized loan obligations (CLOs) and the future of these securitizations.
Tepper noted 2012 brought significant issuance activity for these assets. Moody’s rated 107 deals, totaling more than $46 billion of issuance volume, tripling its activity level from 2011.
In 2013, issuance will be 30% higher than in 2012, or rough $70 billion, Tepper said.
During the past month, Moody’s has upgraded 35 tranches of CLO deals, while downgrading none.
Similarly, commercial mortgage-backed securitization analysts from Royal Bank of Scotland (RBS) recently noted commercial real estate loans tied to CLOs have reopened the market and created "the next frontier."
New issuance could possibly increase to between $5 billion and $10 billion throughout the year.
These types of transactions fill an important void in commercial real estate finance with nearly 40,217 CMBS loans accounting for $471 billion maturing without extension options between now and 2017, RBS noted.
Both speakers also identified various dynamics of CLOs.
Robinson noted that CLOs are not publicly offered because Security and Exchange Commission asset-backed securities requires a "defined asset pool" and the market is not confident enough in doing so with CLOs. Thus, they are privately offered.
Another driver of CLO dynamics is the metrics.
One of the most important metrics of CLOs is the coverage test, specifically overcollateralization – assets to liabilities within a transaction, Tepper said.
"OC tests offer protection to senior classes and contributed to strong asset class performance through the credit crisis. These tests worked as they were intended to – OC tests began to fail and cash was diverted away from junior tranches in order to pay principal of senior notes," the analyst noted.
As collateral quality improved, OC tests started passing again and previously differed interest on junior notes was paid back.