CLO issuance should increase in 2012, says RBS

Royal Bank of Scotland’s CLO analysts expect greater issuance of CLOs in 2012 than in 2011, based on the assumption that market volatility will decline. It forecasts new CLOs with a combined size of between $12 and $14 billion - excluding refinancings - compared to $12.2 billion in 2011.

New issuance should be boosted by the continued strong performance of most existing CLOs, according to the bank's CLO Market Outlook for 2012. It says it expects the leveraged loan default rate to stay below 1.5% in 2012, as a result of the lack of near term maturities and the strength of corporate balance sheets. This will bolster overcollateralisation ratios, with even weaker deals able to recover faster than before the crisis and start making distributions to equity once again.

CLO liabilities are trading at some four to six points less than the aggregate value of their underlying assets, adds the report.