Deal Flood Tests Rating Agency's Capacity
A late-year flurry of collateralized loan obligations exposed a potential limitation to issuance volume: the workloads rating-agency analysts are able to handle.
While Moody’s insists it didn’t turn down any work, the agency concedes that it warned issuers and dealers in November to get in line quickly if they wanted their deals graded by yearend. In the meantime, it tasked some surveillance analysts with reviewing new deals.
“They started telling folks in late November that if they didn’t have their documents in place by a certain date, they wouldn’t be able to entertain the assignment,” one lawyer said. “They did not have the capacity to handle the onslaught.”
With implementation of the Dodd-Frank Act’s risk-retention rule looming on Dec. 24, issuers combined to complete 49 new deals and refinancings totaling $21.4 billion during the month, according to J.P. Morgan. That’s on top of 55 such transactions for $25.9 billion in December, making for one of the busiest-ever finishes to a year.
Market professionals long have recognized that there is a limit to the number of deals that rating agencies, lawyers and other vendors can handle in a given timeframe. But the late-2016 rush may have given them their only first-hand look at that ceiling.
They are pointing to Moody’s in particular because of its standing as the most active rating agency in the CLO sector. It graded about 90 of the November and December transactions.
“There is a functional limit to how much can get done given rating-agency bandwidth . . . [The fourth quarter] was a bit of a high-water mark in that we now know what is possible,” one issuer said. Of course, issuers also face limits when it comes to finding willing investors, locating suitable collateral for their deals and capturing arbitrage opportunities.
In fact, some of those factors may have prevented the pricings of deals that were toward the back of the queue in December. “There is a finite amount of deals that can get done at any one time, and certainly bankers said no on things after a while this year,” one investor said. “Everyone realizes there are only so many things that can get done.”
Whether a rating agency, lawyer or dealer would walk away from an assignment because it was overbooked remains a point of contention, however. “There are always enough lawyers,” another issuer said. “And I don’t think the rating agencies would let that happen. They would just hire more people. Essentially, it’s like printing money.”
January, meanwhile, is expected to bring much slower dealflow. Among the issuers bringing deals to market is BlueMountain Capital, with Citigroup running the books.