NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases the Structured Credit 2020 Outlook, which highlights trends in collateralized loan obligation (CLO) spreads and issuance, other types of securitizations gaining traction, and factors that could influence structured credit issuance in 2020.
The opening months of the new year may prove critical for overall structured credit issuance in 2020. For U.S. collateralized loan obligations, full-year (FY) 2019 issuance will close at around $115 billion, driven by a strong first half. In early 2020, increased bifurcation in the leveraged loan market, challenging deal economics, and a key pocket of CLO investors will impact supply and demand, as well as shape portfolio construction and liability structures.
Key themes in structured credit heading into 2020 include the following:
- Challenging Execution: Collateralized loan obligation arbitrage may be compressed and lead to lower overall CLO issuance for the second straight year (2018 set the all-time record, with 2019 set to be slightly lower). Concerns over loan fundamentals as well as downgrades and defaults will hamper new issuance and increase manager tiering.
- Increased Leveraged Loan Scrutiny: The gap between high- and low-quality issuers widens and increases manager selection and discretion. The new year will be a “credit pickers” market and active managers may reopen CLO documentation to increase optionality.
- Variety of Structures: Challenging deal economics could increase the amount and variety of unique structural features. Delayed draw BB tranches, modifiable and splittable/combinable tranches (MASCOT notes), CCC-heavy deals, and manager-retained senior debt are a few of the tactical 2019 innovations that could carry over to early 2020 to make deals more accretive.
- Bottom of the 19th: December 2019 marks the 126th month of economic expansion in the U.S. Market participants acknowledge we are in “extra innings” but expect the current credit cycle to extend into 2020. GDP growth is expected to continue for the foreseeable future, although at a slower pace than 2019. Sector-specific and idiosyncratic risk should concern investors more than systemic shock, although the specter of general elections next year will likely result in price volatility.
The report also provides 2020 forecasts for new issue, CLO “re-dos”, TruPS CDOs, and leveraged loans. KBRA also touches on leveraged loan fundamentals and specific corporate sector outlooks.
To view the report, click here.
Related Publications: (available at www.kbra.com)
- Global Structured Credit Rating Methodology
- Structured Credit 401: Primer on Combination Notes
- Structured Credit: Falcon 2019-1 LLC New Issue Report
- Structured Credit: Golub Capital Partners ABS Funding 2019-1, Ltd. New Issue Report
- Structured Credit: Financial Institution Note Securitization 2019-1 (FINS 2019-1) New Issue Report
- Structured Credit: Atlas Senior Loan Fund XIV, Ltd. New Issue Report
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.