Issuance of collaterized loan obligations, or CLOs, a complex structured product that helped fuel the leveraged buyout boom, is likely to remain muted in the near term, Barclays Capital analysts said Friday in a report.
CLOs pool high-risk loans sold by junk-rated companies and cut them into various tranches of risk and return. They contained nearly two-thirds of the debt that financed leveraged buyouts in the first half of 2007. Their share had shrunk to about 20% by the middle of last year.
For CLOs to become viable again, spreads on existing CLO securities rated AAA would have to tighten another 115 basis points over the London interbank offered rate, or Libor, to 110 basis points. However, this would still be unlikely to generate a good enough return for banks to provide CLO funding, the analysts said.
And even then, new CLOs would have to compete with existing CLOs that have already locked in a cheaper cost of funding and can buy $20 billion to $30 billion of loans in 2010, the analysts said.