Leveraged loan CLOs greatest source of risk in 2007

Leveraged loan collateralised loan obligations (CLOs) will pose the greatest risk in 2007, according to a gathering of investors and arrangers at a Moody’s conference in London yesterday.

Nearly half the attendees, accounting for equal numbers from the buy- and sell-side, highlighted this product, in a straw poll held at the rating agency’s structured finance conference for Europe, the Middle East and Africa (EMEA).

Attendees expected leveraged loan CLOs to show the strongest growth next year, and also tipped synthetic CDOs and collateralised debt obligations of asset-backed securities for strong growth.

Moody’s expects investors to take further exposure to leveraged loan CLOs throughout 2007, following a record year last year (see Moody's: Basel II fuelling growth in collateralised debt) with strong demand coming from the US, driven by a desire for diversification.

In a report released last week, the rating agency said CLOs are being seen more as a financing tool rather than for purely arbitrage or risk transfer, due to the tight spreads available and their diverse investor base. Moody’s expects CLO managers will move towards active managing, as the market becomes more liquid and higher returns are sought.