2016 CLO Issuance Was Much Higher Than Expected

I recently read a May 2016 Wall Street Journal article about the recovery of CLO issuance after the early 2016 market decline.

CLOs, or collateralized loan obligations, are bundles of “loans from junk-rated companies” that are “[repackaged]…into securities that pay varying levels of interest based on which get paid off first if the underlying loans go bad.”

Because CLOs are a way to invest in financially stressed companies, their performance is highly dependent on the economy. When the economy is doing well, CLOs can offer high rates of return. When the economy does badly, the companies that take out the loans that go into CLOs are often the first to run into trouble, inflicting potentially high losses on CLO investors. Because of that, CLOs are popular when people think the economy is doing well and very unpopular when people think the economy is doing poorly.

A 2012 report from the National Association of Insurance Commissioners shows this. CLO issuance peaked before the Great Recession and almost disappeared during the Recession:

Source: U.S. Insurance Industry CDO/CLO Update

What intrigued me about the WSJ article was the prediction near its end:

Few analysts expect CLO issuance to reach much higher than $50 billion this year…

Whenever I read a prediction like this in a past news article, I wonder if it came true. Thus, I looked up the total CLO issuance in 2016.

As it turned out, it was $72.3 billion. This was, of course, much higher than the $50 billion number “[few] analysts [expected] CLO issuance to reach” in 2016 according to the WSJ article.

I think the fact this prediction didn’t come true illustrates a valuable point. Economic and financial predictions are often wrong. This is true even when the predictions are about something only 7 months away. This doesn’t mean such predictions should be totally ignored. However, it is something to keep in mind when making investing decisions.

As a postscript, the prediction in 2019 was for “US CLO issuance…to fall in 2020.”

Given the current economic situation caused by COVID-19, this prediction seems likely to come true, if for reasons no one expected back in November. That said, it will be interesting to see exactly how things turn out.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the author's opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.