Pro-rata come-back leaves CLOs short of assets, says Wells Fargo

The "pro-rata" share of the US leveraged loan market has grown steadily this year to reach 50% for the past four months, notes Wells Fargo in its Structured Products 2012 Outlook, published this week. The bank's CLO analysts note that having exceeded institutional loan volumes in 2008, pro-rata tranches took a back seat between mid-2009 and early 2011. The leveraged loan market traditionally splits between the bullet tranches such as the term loan Bs, bought by CLOs and other institutional investors, and the amortising A tranche along with the revolver. These two classes, typically purchased by banks, are collectively known as pro-rata loans.

The return of pro-rata funding, provided by healthier banks that are hungry for assets, has reduced the amount of loans available for CLO managers to buy. For borrowers, the main attraction of pro-rata loans is that they pay lower spreads and are often issued without Libor floors.