The CLO market in 2022: from strength to strength?

2021 was a record-breaking year for European CLO issuance, with €38.63 billion of new-issue volume recorded, as well as a total reset volume, including the full equity tranche, of €42.2 billion. Across the market, analysts are forecasting a similar volume of new issuance in 2022, although expectations for resets and refinancings come in significantly lower than the remarkable activity seen last year.

One reason for such optimism is the expansion of the triple-A investor base, with some expecting certain former high-profile investors to re-enter the market during 2022. Of course, there are also some expected headwinds in the form of the ongoing pandemic and inflationary pressures on both sides of the Atlantic. However, CLOs have more than demonstrated their resilience as an asset class over the preceding years.

One area which is expected to receive particular focus in 2022 is ESG. Already a hot topic in 2021, there is an expectation that the market may begin to move from negative screening of collateral assets (now fairly standard in CLO eligibility criteria) to positive screening or scoring for ESG considerations. Also, CLOs may begin to opt-in to, and be marketed as, Article 8 funds pursuant to the EU Sustainable Finance Disclosure Regulation (although it remains to be seen whether CLO managers will be able to access the relevant data on underlying assets in order to avail themselves of such an Article 8 classification). 

From a legislative perspective, the market is awaiting greater clarity on exactly what documentary due diligence a UK or EU institutional investor needs to perform in order to be able to satisfy its obligations under the UK and EU Securitisation Regulations, so that they can invest in non-UK and non-EU CLOs. On the UK side, HM Treasury has recently stated that this question will be looked into “as a matter of priority”. Further input is also expected on the EU side early this year, as part of the European Commission’s report on the functioning of the EU Securitisation Regulation and, depending on the outcome, this may impact how overseas CLOs are reported on. The market also awaits the outcome of the European Banking Authority’s consultation on technical standards on risk retention, and whether that will result in any changes to the analysis relating to risk retainers.

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.