The LSTA is becoming one of my favorite sites on the web for the amount of information they provide to the public. For example, see below for some fantastic slides they put out from their recent conference and my commentary (Note - I have picked and chosen from a number of different presentation ... net/net all presentations are worth the read). Before I do that, I want to just post something I read from Hussman Funds "Weekly Market Commentary" as a backdrop:
"In recent months, I have finessed this issue by encouraging investors to carefully examine their risk exposures. I'm not sure that finesse is helpful any longer. The probabilities are becoming too high to use gentle wording. Though I usually confine my views to statements about probability and "average" behavior, this becomes fruitless when every outcome associated with the data is negative, with no counterexamples. Put bluntly, I believe that the economy is again turning lower, and that there is a reasonable likelihood that the U.S. stock market will ultimately violate its March 2009 lows before the current adjustment cycle is complete. At present, the best argument against this outcome is that it is unthinkable. Unfortunately, once policy makers have squandered public confidence, the market does not care whether the outcomes it produces are unthinkable. Unthinkability is not evidence.Moreover, from a valuation standpoint, a further market trough would not even be "out of sample" in post-war data. Based on our standard valuation methods, the S&P 500 Index would have to drop to about 500 to match historical post-war points of secular undervaluation, such as June 1950, September 1974, and July 1982. We do not have to contemplate outcomes such as April 1932 (when the S&P 500 dropped to just 2.8 times its pre-Depression earnings peak) to allow for the possibility of further market difficulty in the coming years. Even strictly post-war data is sufficient to establish that the lows we observed in March 2009 did not represent anything close to generational undervaluation. We face real, structural economic problems that will not go away easily, and it is important to avoid the delusion that the average valuations typical of the recent bubble period represent sustainable norms."
- There is a significant amount of loan paper that needs to be refinanced in 2014.
- Unfortunately, CLO's are currently structured will not be there to refinance said paper in 2014 because of reinvestment lock-ups. CLO 2014 refinancing capability is essentially nil.
- Other investor types (hedge fund, retail, etc) grow dramatically to soak up CLO wind-downs
- Loan issuers use equity issuance to de-lever balance sheets
- CLOs return to their pre-Lehman glory
- The amount of bonds in a capital structure increases dramatically relative to loans
- Loan issues using the bankruptcy process to rid themselves of over levered balance sheets.
One factor which is not exposed in “The Cliff Refined” chart is a CLO’s ability to push out loan maturities even after the reinvestment period has expired. Typically a CLO can hold loan maturities 6-7 years after the reinvestment period. While you can’t “repaper” the loan, you can push out the maturity through an amendment even after the CLO has gone “dark”. So what you will likely see is another round of amend/extends for the 2012/2013 maturities beginning shortly.Couple that with your last chart and you have 75%+ of the loan market buyer incented to push out maturities. CLOs, to keep AUM high and push out equity option value; Banks/Insurance/FinCos, to avoid a default and capital write down; Prime Funds will be able to reinvest at a higher/market rate.With all that said, this only applies to existing loans outstanding. Agree with you in that new loan creation will be hindered which should put a damper on the LBO market and M&A activity in general. And certainly interest burden is going up for everyone.