A tricky transition: CLOs sector risk intensifies as risk ...cib.db.com/docs_new/ABS_Vegas_CLO_RT_2016.pdf · the MOA, and really a capitalized majority owned affiliate (CMOA) which

9ABS Daily, Las Vegas, February 29, 2016

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CLO ROUNDTABLE

Participants in the roundtable were:Renee Gallizzo, head of capital markets, Sound Point Capital

Christina Jamieson, head of broadly syndicated loans, Golub Capital

Jim Kane, managing director, GreensLedge

Kevin Kendra, managing director, Fitch Ratings

Tom Majewski, managing partner, Eagle Point Credit

Steven Park, managing director, Deutsche Bank

Sean Solis, partner, Dechert

Edwin Wilches, portfolio manager, Prudential Fixed Income

A tricky transition: CLOs sector risk intensifies as risk retention arrives

The CLO market is staring at more uncertainty in 2015 than at any other point since the financial crisis.

It has already been a bit of a slog for the CLO market since 2014, when managers set the all-time record for issuance in a single year. Deal-making was down in 2015, pressured by the intense volatility that battered financial markets broadly, and things are looking similarly difficult this year.

But issuance has been anaemic in the first two months of 2016, as managers grapple with issuing new deals in a time of deepening uncertainty in global financial markets. Turmoil in sectors such as commodities and oil and gas are driving fears of contagion into other industries, and CLO investors are taking a very cautious approach to the market.

On top of this, risk retention arrives this year. Ahead of the final implementation date in December, managers are going to have to experiment with compliant structures to see what works best. Whether they go the route of the manager-owned affiliate, the capital

manager vehicle, or the hybrid capitalised manager owned affiliate, the fact is that with experimentation comes added uncertainty.

A shift in the investor base is also being seen, particularly in the triple-A rated classes. The traditional buyers are showing that they have reduced appetite, replaced by some large names out of Asia. Still, even with a new crop of hungry buyers, it is no sure thing that they will be able to absorb any meaningful supply on their own.

It has been said that the number one concern of managers bringing new deals recently has been placing the triple-As. And yet, even as uncertainty grips the market, new manager and arranger entrants have jumped in over the past year, looking to take slices of a shrinking pie.

GlobalCapital gathered eight CLO professionals from across the manager, investor, arranger, rating agency, trustee and legal sectors to sound off on the state of the market in a time of great transition.

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CLO ROUNDTABLE

: For much of last year, risk retention was the biggest discussion. This year though, it might be more appropriate to talk about risk generally. With oil still sliding and people wondering about contagion into other markets, how are you thinking about risk in 2016?

Kevin Kendra, Fitch Ratings: When we look at 2015 defaults, nearly half of them were in either oil and gas or metals and mining. So when we think about that trend, we see that continuing going forward. The trailing 12 month default rate for the energy sector was about 9.8%, while the trailing 12 month default rate for metals and mining was 12.9%. So, clearly these sectors are underperforming the rest of the overall market. Those are the secular issues we have to deal with and we think that will continue for those two sectors. But energy, metals and mining really only comprise 5% of the overall universe that we are monitoring.

If I had to pick another sector where we see pockets of potential weakness, there are certainly some aspects of the retail sector that we are concerned about. Some retailers have a kind of protected, best in class market position, but there is another group of muddlers that are really struggling in that sector.

The rest of the stories that we’re seeing are probably more company specific and more idiosyncratic. We’re not really seeing the kind of broad sectors that are actually causing systemic risk to the CLO structure. You will certainly see some larger names make headlines, but they are going to be one-off exposures. The concentration limitations within the CLO structure really limit the overall impact to any given transaction.

: Tom, as a CLO equity investor, how are youi thinking about market risk this year?

Tom Majewski, Eagle Point Credit: A fair bit of focus has been spent in the last year on the oil and gas, and metals and mining industries. I think it’s safe to assume that, barring a radical rebound in the price of oil, many of those companies will face stress. I think

where we have some comfort is in the difference in the concentration of the loan market versus the high yield bond market.

Looking at some data we pulled together, the total return on loans was down according to the S&P indices last year. However, according to the data, it’s really only three or four industries that delivered negative total returns in the loan market. We went back and looked at 2000 to 2003, which was the last non-financial crisis credit cycle, and it was the same three or four industries again. So broadly, it does come down to two or three sectors in most cases.

And then a question we ask prospectively in terms of credit is: what is the risk of contagion?

Certainly we saw that in 2008 contagion was much wider, and everyone caught a cold. In 2001-2003 it was just limited to a handful of sectors. Energy, and oil in particular, is both literally and figuratively the thing that lubricates a lot of other businesses. But the flipside of low oil is that low prices may bring some benefits in other industries.

Christina Jamieson, Golub Capital: Weaknesses in China will continue to impact the commodities sector. As China is a huge exporter, the implication is that other parts of the world are suffering, specifically global players in chemicals or commodities.

I agree with Kevin’s views on the retailers. I have always viewed retail as being high business risk, which is difficult to couple with high financial risk. We have seen continued disasters in the retail sector over the past decades. This is exacerbated with the rise of low cost, low quality fast fashion, and how buying patterns have changed among young people.

: I would like to review the risk retention debate. Sean, what are you seeing as the lingering questions about risk retention that were not answered in 2015, and what is the market going to be dealing with in 2016?

Sean Solis, Dechert: Certainly risk retention was the topic last year and I think it will continue to be this year. Each manager has had to figure out for themselves what model works for them, and essentially it’s how you raise capital. No one can comply with the US risk retention rules yet. They don’t come into effect till the end of this year, but there are plenty of folks who have just gone out for vertical strips and deals and said look, ‘we are going to handle our risk retention this way’.

But a large swath of other managers have to figure out structured solutions, and that’s kind of where the action has been. I have spent a lot of time with managers identifying who they are, and what model of kind and structure works best for them.

We have seen some capital manager vehicles (CMV), which is a complete spin out of your business effectively. We have seen two or three of those close on capital, and I think you will probably see more of

Kevin Kendra FITCH RATINGS

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those because those are folks who, for whatever reason, fundamentally don’t have long term capital to solve for the majority owned affiliate (MOA). So we have seen CMVs and you will see more of them.

But what I think where we will see the trend is in the MOA, and really a capitalized majority owned affiliate (CMOA) which is a hybrid of the MOA. The CMOA adds substance to the MOA and you can bring in investors as long as the legacy manager owns at least 10% or 15%.

Now, I think the least desirable solution we have seen is the vanilla one-off MOA where you are going to buy a vertical strip and then you get financing from the various providers that are in the market. It’s not a long term solution.

I think finally the big elephant in the room, as everyone can see, is that risk retention is driving market activity. We have seen a number of managers publicly announce that their parent company may be up for sale.

Anytime you have the regulation like this that radically changes how much capital you need to be in the business, the inevitable factor will be merger activity or some other consideration of, ‘does this make sense for us anymore?’ And we are seeing a lot of that. People are having hard discussions about what are they going to do long term. I think we will increasing strategic transaction activity over time, and would not be surprised to see the total number of managers that are actively doing multiple deals each year diminish.

Majewski, Eagle Point: A contrary point: two out of the four last acquisitions that were announced had nothing to do with risk retention. It sounds like a good sound bite, but it’s factually not the primary driver in two out of the last four transactions that have played out. So size is not necessarily a factor. It’s a quirk in the perception in the market.

Steven Park, Deutsche Bank: In our role as trustee and a service provider, we talk to many managers. We talk to large managers and small managers, and even the

largest of the managers are not fully certain if their structure is compliant. I know the smaller managers are very concerned, but even the largest managers are concerned and do not wish to be the first ones to go to market.

Jamieson, Golub: It shouldn’t be bifurcated by size; it is a reflection of how the company is capitalised and the source of that capital. We are a relatively small firm in the whole scheme of things, with three middle market CLOs last year for $1.8 billion and three broadly syndicated CLOs for $1.4 billion.

: Jim, coming from the arranger side, how are you seeing the managers that GreensLedge works with thinking about risk retention this year?

Jim Kane, GreensLedge: We are a little bit of an anomaly in the arranger space, not being a large investment bank. We have been receiving, understandably, a lot more inbound phone calls from the obvious small counterparties and small managers that are anxious to try to understand what their options are. But interestingly, some of the larger managers that you would think have their own internal solutions are also reaching out to us, which basically says to me that it’s not that easy to raise this capital.

It’s not easy to raise the capital because of what everyone has commented on, and the idea of who really wants to go first. What it means to go first is cutting an economic deal that is favourable to an investor. Or you can commit to a vehicle, whatever it is – MOA, CMV, CMOA – where, by definition, the one principle is that you to have to commit to hold. You need to stay invested for longer than you would otherwise need to stay invested if you were buying regular CLO equity.

So I think this year is going to be, for many businesses – whether they’re managers, investment banks or others – a year of real transition. And with transition comes confusion. It is also going to come with a reduction in activity, and on this specific topic, I think you are not really going to see solutions truly form until after the end of the year. These things take a lot of time and they take a lot of effort and they take a lot of resources.

: Based on what Jim and Sean said, that it is going to take a bit of experimentation to figure out what the best expression of the rule is, how do you at Prudential look at managers that you are going to be buying from this year?

Edwin Wilches, Prudential Fixed Income: I agree that this is the year of transition. Risk retention is something we definitely focus on quite a bit. I have always had pretty strong concerns around collateral managers that also own a majority of their equity because during the financial crisis, when we had issues,

Sean SolisDECHERT

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CLO ROUNDTABLE

it was tough to find some balance when the same legal counsel represented the majority equity holder and the interests of the issuer.

In more general terms, you need to have a discussion with the management team and ask them to articulate their detailed solution. One can quickly figure out their objectives and whether they have an actionable, realistic plan.

In the longer run, I do have concerns around the one-off solutions Sean mentioned. For instance, how does it work going forward if they have a number of these one-off solution deals, and then one trips a trigger and goes down? How are the other deals ring-fenced? I think there are a lot of those types of questions that the market may not fully appreciate. Investors still have work to do around the specifics of the regulations. So going forward, we’re focusing on larger firms that I think will have a lot of franchise value at risk—scenarios where I know that even if something goes awry, they are going to be incentivized to make it right.

Renee Galizzo, Sound Point Capital: At Sound Point Capital, we set up our MOA structure such that there is no question as to whether or not it would meet risk retention in the end; we are taking a majority position in the fund and raising capital alongside that. Generally, there could be some questions about how [Generally Accepted Accounting Principle’s] ‘majority’ concept is interpreted at the end of the day, hence our initial conservative approach. Looking at other managers, I think those with an MOA that are taking a conservative approach [to interpreting a ‘majority’] will be better suited. I also think that the CMV and the hybrid CMV structures mentioned earlier can be viable options as well, although they can take a very long time to set up.

: Moving away from risk retention, with regards to the landscape of the market in general, is the market for CLO managers and arrangers getting more crowded this year? How are you all thinking about competition in 2016?

Kendra, Fitch: When we think about how CLO issuers are operating in the space, certainly showing operational competency is something that has to be accomplished. But then when we get past that basic level of competency, you see lots of different tastes and flavours in how managers look to manage their structures.

You are going to see different styles, different techniques, and that gives investors different tastes and preferences. I think that is a good thing for a healthy market. Limiting the number of participants in the market really kind of takes away from investor choices and that’s something that we have to be mindful of. As far as structurers go, we have certainly seen a number of different structurers coming into the marketplace, but they have been there for a while and I don’t think

that’s necessarily anything that’s drastically different. I think there is something to be said for how the

CLO investor base has evolved. We have certainly seen interest from US banks, US insurance companies, and Asia is also a huge investor base.

So, as you see that dynamic change, there are certainly other players and people who distribute bonds into those markets that actually are taking advantage of that. I think that’s just the natural evolution of how the market is going. We are in Asia several times a year talking to those investors directly, and making sure that everyone is comfortable with our view of the overall market.

Jamieson, Golub: We started 2015 with supply impacted by the leverage lending guidelines, and a resulting decline in the number of loans that were issued, thus creating a favourable environment for issuers.

Mid-year, three things happened. The high yield market and crossover investors ended up with their own set of problems in terms of meeting redemptions, resulting in their selling of loans. Then we saw retail outflows. Finally CLO issuance was down as there were not only fewer managers, but capturing investor interest was complicated as it was difficult to demonstrate risk retention compliance.

All three things had a big impact on supply, demand and balance. At year end there wasn’t much issuance, but we are seeing better spreads; we are also seeing people add covenants to deals, which I haven’t seen since 2009. But it’s still a bifurcated market.

We still have difficulty in terms of the long-term supply that’s going to feed the CLO engine and the cost of triple-As. If you can buy a bond in the secondary market at 180, why would you buy a primary loan at 150? To my point about 2016 being a continuation of 2015, I don’t think we’re going to see any big corrections or improvements. It’s just going to be another year where we don’t really know. Once the risk retention issues are resolved, then maybe things can get

Christina JamiesonGOLUB

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CLO ROUNDTABLE

back to normal. But for right now, I’m concerned about the supply of assets for the CLOs.

: Steven, you’ve got somewhat of a unique point of view at the table here, so is there something that you see that separates managers?

Park, Deutsche Bank: I have been on this side of the business for quite a while. At Deutsche Bank we have a very impartial view of the market, because we work with a wide variety of managers. We were there pre-crisis and post-crisis, and we have seen managers with significant infrastructure, with systems and people, and we have also seen managers with just a Bloomberg terminal and a calculator who were printing deals left and right.

Post-crisis, some of these managers did not survive, but many of the larger managers who had a significant infrastructure and who really stuck to their credit standards are still in the business, and we continue to work with them. Whether you trade or not, or you just buy and hold, the significant difference seems to be that, if you have an event, you are able to act on it, and make a decision quickly rather than just sitting on a position. We have seen a lot of managers with similar positions, where one manager traded out of it and another manager just held onto it, which led to very different results at the end of the day.

So, I think having that type of credit experience is critical. Also, combining that with people who have structuring experience is also a key. For a lot of the bigger managers, they have both sides supporting their deals. One is the structuring side, and second is the actual hard-core portfolio management side. When you combine both, you stay ahead of the curve in terms of coming in and out of credits during difficult times. This is the trend that we have seen in the markets as we come out of volatile times.

: When we talk about competition and increased number of players Jim, on the arranger side, where is GreensLedge’s niche in 2016?

Kane, GreensLedge: There are too many arrangers, for sure. There are probably 12 or 13 that have active efforts. I’d say that the irony of my business model is that as an independent, I’m not inside of a large bank, and Steven made this comment earlier that we have a seven year head start over the banks to think about how to run these businesses in a more capital efficient manner.

I think a lot of other arrangers sort of got into the business because it’s nice to have it as an adjunct to their loan business, which it is. It’s fantastic to have it as a window into what is happening in the price action in the CLO space, but just like there are leaders in the par loan business and the broadly syndicated loan business, those folks that have large par loan BSL [broadly syndicated loan] arranging businesses should

have, and will continue to have, large CLO arranging businesses.

So, I think from our perspective we’re just very different. We’ve arranged $1.6bn of CBOs [collateralised bond obligations] last year, two for Anchorage, one for Fortress. And so, I think our niche is going to continue to be the high service, high creativity model.

So I’m very optimistic about our business for this year, in the largest part because we’re like that little inflatable craft that is zooming around the super tankers. So, we can break left quickly, we can break right, we can arrange CBOs when they make sense.

Jamieson, Golub: The increase in the number of arrangers is due to low barriers to entry. Any firm can decide that they want to hire a few experienced people and run a side business. To your point, they are going to flame out; they will make one big mistake or something will happen. This will correct itself over time.

Park, Deutsche Bank: It seems like a lot of managers have two main questions: can you give me a balance sheet, and then can you place my triple-As. A lot of the new arrangers were coming on board, as they saw an increase in issuance volume in 2014 and 2015. The arrangers see all this activity, and ask themselves, ‘how can we not be in this business?’ So now in 2016, for those arrangers who can provide both a warehouse and also place the triple-As, these should be slam dunk transactions for them.

But what Jim was talking about, some of the firms who don’t have that capability and can still do the deals, I think that says something about that particular firm and how they are placing their transactions.

: On the buy-side, where are the movements being seen and where are the demographics moving in terms of the capital structure? Is the triple-A buyer base shrinking? Why is it hard to place triple-As?

Jim KaneGREENSLEDGE

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Kendra, Fitch: I think the triple-A investor base ebbs and flows over time quite a bit. Right now, it feels a little more constrained than it has been in the past. There is far more interest from Japanese investors. We spend a lot of time educating the investor base on the asset class. We have held mini conferences in Seoul and Tokyo talking to regional banks in those markets, educating them on the loan asset class and educating them on the CLO asset class.

So while what we’re experiencing right now feels particularly constrained, what we really see is a number of individuals, in Asia and in the US, still going through the education process.

Majewski, Eagle Point: If you compare the CLO market to the commercial mortgage-backed securities [CMBS] market, there’s far more CMBS triple-A buyers than CLO triple-A buyers. Many insurance companies in the United States have an allocation to CMBS triple-As somewhere in their general account. It is typically limited to the more sophisticated insurers for CLOs. At the bottom of the stack, there are 15 active B-piece buyers in CMBS land, while there are dozens and dozens of CLO equity buyers. So we have this flip.

Essentially every CMBS B-piece got wiped out in the last cycle, while 96% of CLO’s have a positive return to the equity class. But the triple-As in CLOs are certainly constrained today. There’s five or six big investors. The good news is there’s significantly stickier blocks of capital there, but the universe of equity buyers and junior debt buyers, while it’s certainly a lot bigger than CMBS, is a lot smaller than it was 18 months ago, and what causes that to change, frankly, is not entirely clear.

Gallizzo, Sound Point: On the triple-A side, I see new entrants in the market, as Kevin mentioned, from Japan, outside of the big stable players that are already in the market now. In the US, I don’t see a lot of new players coming to market. There’s considerable competition going on in various ways for triple-As in the US. There’s a small subset of investors that

can only invest in primary and then there’s a larger subset that can invest in both primary and secondary, which is causing competition between primary and secondary markets. There are also some investors with the flexibility to look at triple-A opportunities in CMBS or [Federal Family Education Loan Program deals], also causing increased competition.

Wilches, Prudential Fixed Income: I would say that the investor base has changed in the last 18 months. I think the predominant buyers of triple-A CLOs spanned five categories: insurance, banks, pensions, asset managers, and hedge funds. I think demand from banks for senior bonds will remain strong. The regulatory framework around liquidity coverage ratios and high quality liquid assets will actually push banks to higher-quality, high-spread assets, and CLOs often look more attractive than other ABS products despite some FDIC fees.

Demand from insurance and pension buyers for senior bonds also remains healthy. On the other hand, hedge funds and some asset managers have been selling existing positions over the last eight weeks. Hedge funds have been unwinding levered triple-A positions, among other mezzanine debt, as they de-risk. Asset managers have been generally selling to either meet redemption requests or to rotate into other opportunities that have underperformed CLOs.

Where I see a more challenging issue is in the mezzanine and equity tranches. I think there’s a ‘flush’ that will need to happen as ‘weak’ holders become forced sellers. The meaningful downturn in oil prices, even just this year’s move alone, has caused substantial price action in secondary CLOs — should funds start to actually get redemptions, whether it’s hedge funds or retail funds, some pockets will need to sell.

Right now, there are definitely investors that focus on just the primary market, and a handful of investors focus on both the primary and secondary markets throughout the capital structure. The mezzanine and equity tranches have traditionally been occupied by hedge funds that today are under some duress from poor performance. Market levels aside, what really

Edwin Wilches PRUDENTIAL FIXED INCOME

Tom MajewskiEAGLE POINT CREDIT

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CLO ROUNDTABLE

helped 1.0 CLOs was having really long reinvestment periods and greater flexibility in the types of collateral that could be purchased to build par. So when 2008 hit, investors still had five years to work through the cycle. This time, even in the 2014 deals, if there is a crisis tomorrow, you don’t have that period of time to just bounce back, build par, and create returns.

Kendra, Fitch: Edwin brought up demand from overseas investors, and we hear of them having interest in other asset classes, like US CMBS or European CLOs. As they’re focused in on different areas, it’s going to shift the demand for the US CLO market. I think that’s an important dynamic that, again, just feeds that ebb and flow of who’s actually active in the US primary market. Jamieson, Golub: We spent a week in Tokyo in January meeting with Japanese investors who have had varying recent market activity. Increasingly we heard that the strength of the dollar was having a big impact on their decisions, so while there’s interest, we need the dollar to weaken for that to become a reality. The swaps are too expensive.

Park, Deutsche Bank: I have a quick question for anyone who has raised money in Japan. Do you see their buying appetite a little bit different or their investment criteria a little bit different post-crisis? Because they didn’t really fare that well during the crisis. But now they’re coming back and they’re really coming back strong in triple-As. So do you see them looking for different criteria when investing in deals?

Jamieson, Golub: My experience is it’s the same. Unfortunately there’s still a problematic hang-up on regular covenants and aversion to covenant-light transactions. Fitch has taken a very important role in displacing Standard & Poor’s and many of the firms want to see S&P on the book, requiring an S&P recovery rate metric. While covenant light deals are generally better credit quality, for a strong S&P

recovery rating you need a strong player. It is hard to build a portfolio with a covenant heavy deal and a high recovery rating.

Kendra, Fitch: Those banks are certainly a focus for us, and I think that the more that we continue to do our business and educate them on how we view the world, I think it will help and we’ll continue to make headway. We’re very interested in building long-term relationships with all of those banks, and we’re committed as a firm to try to do that, but you don’t build that relationship overnight.

: Christina, are you seeing a broadening of middle market managers going for more broadly syndicated business or are you planning for that at all this year?

Jamieson, Golub: They’re two distinct strategies. Our middle market platform has been in place for over 20 years, and we have a broadly syndicated platform that’s been in place since 2006. There is a perception that since we were already doing middle market, we decided to be broadly syndicated as well and go to market with some CLOs. This is not the case. There’s no receptivity in the market for that approach, as people focus on the middle market versus broadly syndicated skill set, and don’t want that diluted with a hybrid. I don’t think you’ll see that happening very often. It’s hard to get traction as a middle market lender without a lot of experience and demonstration of ability, which we have. In the broadly syndicated market, you can always use the secondary market to sell assets; in the middle market, it’s buy and hold, period.

Kendra, Fitch: Last year I think we saw only about $4bn-$5bn of middle market CLOs issued in the US and that’s down probably 20% percent from the year before. But when we think about 2016, the big shift in the middle market space is GE selling off Antares and what’s that going to do to the capital market side of the equation. We think that Antares will use securitisation as one of their financing platforms.

And so the big question in my view on the middle market space is whether there is enough CLO investor demand for a 20% increase in market issuance. It’s realistic to assume that Antares could add 20% to the issuance levels. And that’s a big open question. The middle market is really an interesting space within the CLO context, and I also agree that managers will need to have a long history of experience and proven track record to really attract the CLO investors in that space

: Steven, is there anything you and Deutsche are working on in terms of tech initiatives or anything that would make easier for managers and investors to monitor collateral?

Park, Deutsche Bank: The market has changed a lot for

Steven ParkDEUTSCHE BANK

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our business and to that end it has really benefited the managers. The fees have come down over the years, but it’s almost like a technology enhancement for us as a service provider. Where once we had 10 people supporting a transaction, now we have three people supporting the same transaction and clients actually get better service and enhanced technology. At Deutsche Bank right now, we have an on-line platform that managers, underwriters and investors can all use. It’s a platform that allows you to see your transaction in real-time.

This is all web based and available through our Deutsche Bank Autobahn App Market. You just log in and you actually get to see your portfolio right there. So for those of you who never disconnect from the office, if you have a laptop or iPad, you can sign-in from anywhere to look at your positions and also see all of your compliance status requirements. I think this can lead to some managers not having to have a system in-house any longer. You can actually get the Deutsche Bank App which we will provide to you, almost free of charge. The next phase of this business will be getting real-time loan information and data the way you might do with CUSIPs. So for 2016, I think that will be a big focus for Deutsche Bank.

: To wrap it up, I want to go around the table and get everyone’s issuance projections for the year.

Solis, Dechert: Looking back at this round table last year it seemed like most people said $68bn and it ended up being $95bn. So it seems to be in my experience that people tend to underestimate. But I do think for all the reasons discussed today, there’s various stresses in the market. So I’m going to say actually this year it’s somewhere in the range of $70bn-$80bn.

Wilches, Prudential Fixed Income: In the U.S., I may be a little bit more bearish than Sean. I would say $45bn feels like a decent run rate for the U.S. and around €15bn in Europe. Some of it will also depend on the volume of underlying bank loan issuance. Interestingly enough, risk retention vehicles that were raised last year will likely want to get invested and there will be opportunities there. That being said, I think deals are meaningfully smaller in size. I’ve been surprised by this year’s first two deals which were essentially $400m each. After that, most other new issues were in the same ballpark. So maybe $45bn is high—there will need to be a lot more $400m deals to hit that that number. But the tide could quickly change.

Gallizzo, Sound Point: I am also a little more bearish - I think about $55bn-$60bn. There are a couple of things in play: number one is figuring out risk retention. I think that is going to be in flux a bit. Number two is price discovery and figuring out where triple-As in the new issue market are going to land; then the rest of the capital stack, if all goes well, should fall into place and you’ll start seeing more issuance. The other dynamic

to consider is the considerable amount of warehouses open from last year that are either going to have to terminate, which could be a disaster, or roll into a CLO. I estimate maybe 40 to 50 open warehouses, which is about half of the issuance number that I just quoted.

Jamieson, Golub: I’m at $60bn. The biggest problem is getting the math to work. Everything that was mentioned I heartily agree with; the supply and cost of the liabilities will make it hard to get a lot of traction.

Park, Deutsche Bank: $55bn-$60bn is kind of what we foresee because we work in collaboration with our bankers, and they’re predicting a smaller market this year.

Kendra, Fitch: I think that we’re in line with all the other thoughts we’ve already heard from other folks.

Majewski, Eagle Point: We’re $75bn-$80bn with some risk to the downside. I agree with Renee’s number of probably 40 warehouses out there. That they’re all going to get converted in one way, shape or form would be my expectation. Take that, and the fact that we only have 11 months, because the first month was only a billion-dollar month, that’s still only $6bn-$7bn billion a month, divided by a $400m-$500m average deal size.

Kane, GreensLedge: I basically agree with what everybody said. The technicals are so unpredictable right now that I think no matter what, it’s going to be a more volatile year than less, which generally results in production being lower. Most of the debt stack doesn’t like volatility, so is it $55bn or is it $60bn? It’s not $100bn, so it’s going to be probably somewhere in that range because of all of the vested parties around this table, and worldwide, that are interested in the product. s

*The commentary above represents the views of Christina Jamieson, and not necessarily the views of Golub Capital.

Renee Gallizzo SOUND POINT CAPITAL

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A tricky transition: CLOs sector risk intensifies as risk ...cib.db.com/docs_new/ABS_Vegas_CLO_RT_2016.pdf · the MOA, and really a capitalized majority owned affiliate (CMOA) which