The Resurgence of the CLO Market

Meredith Coffey, LSTA Moderator

John Clements Citigroup

David Golub Golub Capital

Bret Leas Apollo

Rob Zable GSO/Blackstone

1

Whats new in CLOsand what does it mean for loans?

CLOs stunning performance to datedo investors care?

What does CLO issuance look like in the near term? The

medium term?

How will changes in CLOs change the loan market?

The $64 billion question: Could regulation squash the CLO

revival?

Outlook or How I learned to stop worrying and love CLOs

2

Section 1: CLO performance and investor base

Brief performance recap Prices and ratings and lossesoh my!

What do CLO AAA spreads indicate?

New investors? What makes CLOs attractive?

How has the investor base changed?

What are these new investors looking for?

3

Performance: CLO prices and ratings recover

CLO 1.0 secondary prices recover

Price (

% o

f par)

Source: Citi Research, Moodys

0

20

40

60

80

100

120

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

AAA AA A BBB BB

CLO AAA notes downgraded, but recover

% o

f A

AA

CLO

note

s

4

0%

20%

40%

60%

80%

100%

20

09-0

3

20

09-0

6

20

09-0

9

20

09-1

2

20

10-0

3

20

10-0

6

20

10-0

9

20

10-1

2

20

11-0

3

20

11-0

6

20

11-0

9

20

11-1

2

20

12-0

3

20

12-0

6

20

12-0

9

AAA AA ABBB Below

Performance: CLO note impairments have been all but

non-existent

Cumulative impairment rate from Jan 1996 to May 2012

Source: Moodys Investors Service

Unimpaired 98.57%

Realized losses at mat 0.78%

Dist. Exch. 0.17%

Market value EOD 0.02%

Other 0.46%

5

Performance: CLO losses lower than most other asset

classes Five-year cumulative IG loss rates

Source: Moodys Investors Service

Loss r

ate

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Glo

bal C

DO

s e

x C

LO

s

US

RM

BS

/HE

L

Str

uctu

red F

ina

nce

US

CM

BS

EM

EA

AB

S, C

MB

S &

RM

BS

US

AB

S e

x H

EL

Glo

bal C

LO

s

IG C

orp

ora

tes

Asia

-Pa

c A

BS

, C

MB

S &

RM

BS

6

CLO AAA spreads remain wider than other asset

classeswarning sign or opportunity?

AAA secondary spreads

Source: Citi

Spre

ad (

bps)

0

200

400

600

800

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

CLO AAA Auto AAA

Credit Card AAA Student Loan AAA

7

Section II: How will CLO volumes change?

In the near term CLO issuance has rebounded

But making the economics work is challenging

In the medium term How big will issuance become?

Will CLO issuance match CLO amortization?

Where does the CLO market stabilize?

What does this mean for CLOs role in the loan market?

8

CLO issuance is recovering in 2012

Source: Citi

CLO issuance rebounding in 2012.

Volu

me (

$B

ils.)

0

25

50

75

10020

04

2005

2006

2007

2008

2009

2010

2011

YTD

201

29

CLO issuance climbs in 2012; CLO AAAs fluctuate

Source: Thomson Reuters LPC

CLO issuance rebounding, AAA spreads moving roughly inversely to volume

Volu

me (

$B

ils.)

AA

A s

pre

ad (

bps)

100

110

120

130

140

150

160

170

180

0

1

2

3

4

5

6

7

8

Jan-1

1

Feb

-11

Ma

r-1

1

Apr-

11

Ma

y-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-

11

No

v-1

1

De

c-1

1

Jan-1

2

Feb

-12

Ma

r-1

2

Apr-

12

Ma

y-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Issuance Avg AAA spread (excl. MM)

10

In the short term: The arb is challenging

Source: Thomson Reuters LPC, LCD, Citi

CLO AAA spreads widened as loan spreads narrowed counter-balanced by tightening CLO mezz spreads

Inst. loan s

pre

ads

BB

B C

LO

spre

ads

CLO

AA

A s

pre

ads

0

20

40

60

80

100

120

140

160

180

0

100

200

300

400

500

600

700

800

900

1000

Jan-1

1

Ma

r-1

1

Ma

y-1

1

Jul-1

1

Sep-1

1

No

v-1

1

Jan-1

2

Ma

r-1

2

Ma

y-1

2

Jul-1

2

Sep-1

2

B+/B "all in" inst spreads

BB/BB- "all in" inst spreads

CLO AAA spreads

11

650

700

750

800

850

900

500

520

540

560

580

600

620

640

660

7/1

1/1

2

7/1

8/1

2

7/2

5/1

2

8/1

/12

8/8

/12

8/1

5/1

2

8/2

2/1

2

8/2

9/1

2

9/5

/12

9/1

2/1

2

9/1

9/1

2

9/2

6/1

2

BB

spre

ads

BBB DMs BB DMs

In the short term: How do secondary loan prices &

warehousing (or lack thereof) affect CLO performance?

12 Source: S&P/LSTA Leveraged Loan Index, Thomson Reuters LPC

91

92

93

94

95

96

97

12

/31

/201

1

1/3

1/2

012

2/2

9/2

012

3/3

1/2

012

4/3

0/2

012

5/3

1/2

012

6/3

0/2

012

7/3

1/2

012

8/3

1/2

012

Secondary loan bids rally

0%

5%

10%

15%

20%

25%

30%