As various–and sometimes opposing–forces pull on the global market for leveraged finance, Standard & Poor’s Ratings Services sees several trends that could hurt credit performance, transaction volume, and market pricing, as well as increase loan market volatility heading into 2015.
In the U.S., even as a strengthening economic recovery supports our generally stable outlook for speculative-grade corporate issuers in the next year, the new regulatory landscape will likely have a profound effect on leveraged loans–the bulk of which are repackaged into collateralized loan obligations (CLOs). The most immediate challenge facing CLO issuers in the U.S. is compliance with the Volcker Rule–the part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that restricts banks from making certain kinds of investments. On top of that, looming risk-retention rules will likely have the biggest effect on the leveraged finance market next year. Recent estimates suggest the rules, which go into effect two years from the date of publication (which we expect by the end this year), would affect as many as 40% of current CLO fund managers.
All told, we have a slightly negative outlook for leveraged loan issuance in the U.S. in 2015, relative to this year. Standard & Poor’s believes new-issue volume could shrink 10%-15% next year because of the increasingly restrictive regulatory environment, certain trends in CLO formation, an uncertain interest rate environment, and the divesting of leveraged loans by bank-loan mutual funds.