October 5, 2023 - At the LSTA’s Annual Conference on October 12, Andrew Berlin (LSTA), Ralph Hinckley (Morgan Stanley), Rachel Russell (Morgan Stanley) and John Popp (Credit Suisse) will discuss whether lenders are evolving or devolving – and what this means for the loan market.
Though institutional loan demand continues to be dominated by CLOs, nearly 40% of existing vehicles are projected to be out of their reinvestment periods by the end of the year, clouding the forecast for demand. This factor could be a catalyst for other lenders, including private credit funds, and the secured bond market to pull additional share. But are CLOs’ structural limitations necessarily absolute? How might certain flexibilities that CLOs have following their RP exits provide some degree of technical support?
More demand questions need unpacking: First, where is all the retail money that typically chases floating-rate funds in a rising interest-rate environment? Fund flows have behaved differently in this rate hike cycle despite strong returns from loans. While loan funds comprise just a fraction of the market, CLO issuance has been choppy. Expectations are for rates to be higher for longer. Will the draw of lower-risk, rate-sensitive alternatives create an observable gap in the market?
Second, the menu of investment options has grown substantially. This has empowered institutional and retail investors to ask tougher questions. How have allocations to leveraged loans been impacted? What exactly do investors want to know before committing to the asset class, and how are managers defending it in an 5%-plus interest-rate environment?
Third, what is the perfect (positive) storm of events needed to restore the CLO arbitrage mechanism and create momentum for CLO issuance, or at least more resets and refinancings? To what extent will CLO issuance be determined by new capital requirements for U.S. banks and less restrictive monetary policy in Japan? And what might be the resulting shift in the investor mix for AAAs? Is the CLO market at risk of losing historical investors?
Lastly, what new risks to the lender base could emerge?
Join us next Thursday as we take a closer look at these challenges and opportunities and explore their various outcomes. The agenda and registration are available here – we hope to see you next week!
