On July 21, 2014, Thomson Reuters LPC issued a Weekly Credit Markets Snapshot report stating that US collateralized loan obligation (CLO) assets under management (AUM) increased to $335 billion (based on a universe of 814 CLOs), up over $35 billion so far in 2014.

Issuance of US CLOs through July 21, 2014 is at $65 billion and is expected to exceed the $81.3 billion level reached in 2013. Analysts also believe that the number of CLOs issued in 2014 will surpass the peak issuance of more than $100 billion in 2007. Thomson Reuters LPC suggests that the surge in US CLOs is due to a broader investor base that is increasingly attracted to the new Volcker Rule-compliant notes with favorable AAA spreads.

Additionally, Thomson Reuters LPC reports that banks are returning to CLOs after regulators extended the deadline to divest or amend Volcker-non-compliant CLOs from 2015 to 2017 (see Legal Update, Fed Grants Banks Two-year Volcker CLO Extension, Banking Groups React Negatively). Banks are working to create Volcker-friendly notes to comply with the Volcker Rule by removing bond buckets and considering springing securities baskets, or by giving up manager-control provisions.

The CLO market has performed historically well, even during the financial crisis, especially when compared with other ABS asset classes such as MBS. However, due to the massive growth in CLO AUM over the past few years, critics fear that CLOs may be facilitating the next asset bubble in the leveraged corporate loans that comprise most CLO collateral pools.

But with regulations such as Dodd-Frank risk retention requirements (see Practice Note, ABS Risk Retention under Dodd-Frank) likely to become effective next year, CLO issuance may soon be tempered. Issuers may be looking to maximize issuance now, before those rules take effect.