The CLO market in 2021: grounds for optimism?

With overall European CLO volume and issuance size down in 2020 compared to prior years, the hope in the market is that 2021 will see the market rebound strongly.

And, although the trials of 2020 look set to leave their mark on the CLO market going forwards, with some consolidation of collateral managers expected as the market reshapes itself, the inclusion of new terms in documentation (as has already begun) allowing greater flexibility in debt workouts and restructurings, and a potential wave of refis and resets if spreads continue to tighten through the year, there is a strong sense of optimism following announcements and deployment of vaccines around the world, Covid-19 levels beginning to fall and changes to the US presidency.

Realising any rebound will, of course, depend on there being a strong supply of primary loans through the year and demand for equity continuing to pick up. It will also require CLOs to remain robust through what is expected to be a turbulent year in the credit markets, as Covid-related financial support from governments is withdrawn. For some CLOs, this might result in ratings downgrades and test failures.

It should help the European market that many of the uncertainties that prevailed over the last year or so as a result of the direction of travel regarding Brexit and, more significantly, the decision of the Dutch tax authorities to charge VAT on investment management fees, appear to be behind us now.

From a legislative perspective, it’s likely to be a relatively quiet year for European CLOs, which will be a relief for a market that has had so much to contend with in recent years. With that said, one important development early this year is expected to be the decision by the Joint Committee of the European Supervisory Authorities on the issue of exactly what documentary due diligence an EU institutional investor needs to perform in order to be able to invest in non-EU securitisations (which, of course, includes CLOs). This development has the potential to reshape the US CLO market, which would bear the brunt of a decision requiring the same levels and types of due diligence for non-EU securitisations as those required for EU securitisations.

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