Will Collateralized Loan Obligations Remain Popular in 2015?

Fed expected to proceed with caution

by Ron D’Vari, CEO, & James Frischling, President, NewOak

NewOak is an independent financial services advisory firm built for today’s global markets. Led by a team of experienced market and legal practitioners, NewOak provides a broad range of services across multiple asset classes, complex securities and structured products for banks, insurers, asset managers, law firms and regulators, including financial advisory and dispute resolution, valuation, credit and compliance, risk management, stress testing, model validation and financial technology solutions. We have analyzed or advised on more than $4.5 trillion in assets to date. Visit www.newoak.com.

The leveraged loan market is expected to continue benefiting from a low chance of rising defaults near term, stable economic outlook for the U.S. and robust investor demand. The risks are deflation in Europe, slower global economic growth, geopolitical shocks and any impact from the actual implementation of regulatory changes.

While the prospect of the Federal Reserve raising rates in 2015 is on everyone’s list, the Fed is expected to act cautiously. Investors will be closely watching mergers and acquisitions and debt refinancing activity in the U.S. and globally to find opportunities. Net-net, falling oil prices should contribute positively to the overall credit environment, with the exception of some near-term volatility for energy industry suppliers. Most, if not all of these factors are expected to continue in 2015. Primary leveraged loan issuance will depend on M&A, refinancing and corporations’ desire to borrow for expansion.

A stable credit environment and interest rates should play well to maintaining investors’ demand for collateralized loan obligation (CLO) debt and equity tranches. One unknown is the impact of tougher risk retention rules that may dampen issuance growth. As a result, primary U.S. CLO new issuance is expected to slow down to $70 billion – $80 billion in 2015. By contrast, European CLO new issuance is expected to continue to rise, reaching 15 billion – 25 billion euros.

Investors will be closely watching mergers and acquisitions and debt refinancing activity in the U.S. and globally to find opportunities

Secondary market liquidity is expected to remain relatively strong due to stable underlying performance and structure. As refinancing optionality of CLO equity tranches has dampened, the callability risk of the debt tranches has reduced. Legacy CLOs may be an exception.

Overall, we anticipate another good year for both U.S. and European leveraged loan and CLO markets and expect they will remain an investor focus.

Can Millennials save the housing market

According to the Census Bureau, the homeownership rate in the U.S. is at its lowest level since 1995. First-time home buyers, historically representing 40% of the market, have been hovering below 30%. The millennials get blamed for many things and their inability to contribute to the housing market can now be added to the list. The question is whether the millennials can actually save the housing market?

Tighter credit standards and slow wage growth are most cited as the reasons holding millennials back from homeownership and sending demand for rentals soaring. The chief economist at Trulia argues that nationally, buying is 38% cheaper than renting and the gap has only widened over the last year.

The millennials are increasingly hit with a number of factors, including mounting student loan debt, a weak economic recovery, stagnant wage growth and tighter credit standards. A number of less economic reasons are also delaying millennials from purchasing a home, including postponement of family formation and changing demographics.

Another overarching factor contributing to the lack of millennial participation in the housing market is the hangover from the financial crisis. The once-held American belief of owning a home being the best decision you could make because the value of a home always goes up has been shattered. The millennials witnessed a very different market reality, along with the carnage that was left when the housing bubble burst.

What will change their view toward housing? Continuing improvement in key drivers like the economy, employment and specifically, wage growth, will be essential factors. The recent jobs report is certainly an indication that things are getting better. Add to that the steady increase in the cost of rentals and the tide is sure to turn. The last piece of the puzzle is lenders and the extent to which they will work with millennial borrowers. They may not fit the qualified mortgage box, but therein lays the opportunity.