(Bloomberg) -- Canada Pension Plan Investment Board has invested £75 million ($96 million) in a structure from UK direct lender ThinCats that's similar to a private collateralized loan obligation, another step in Europe's slow evolution toward a market for private credit CLOs.
The pension plan's investment is a show of support from one of the world's largest private markets investors for the securities, which are bonds backed by private credit loans to risky companies. While the US has a robust market for private credit CLOs, they haven't taken off in Europe.
The £700 million structure, launched by ThinCats in September, holds loans to UK companies with annual revenue of as much as £30 million and earnings of up to £5 million, according to the firm.
A CLO typically has several tranches of varying degrees of risk, each with a corresponding credit rating. Interest payments from the loans are divided up among the holders of the various tranches. The ThinCats vehicle is similar, though it is sliced into fewer portions than usual —- three — and the tranches are unrated.
Citigroup Inc. and Barclays Plc hold the most senior piece of the ThinCats structure, while the pension plan's CPPIB Credit Investments Inc. will hold a mezzanine tranche and ThinCats holds the lowest-ranked slice of about £100 million, known as equity. Holders of this tranche receive money last and if there are defaults by the companies taking on this debt, that's taken out of these profits.
Europe hasn't developed CLOs backed by private credit loans because the market is smaller and there's a lack of diversity among borrowers. Banks also have offered an abundance of traditional finance for private credit funds. Still, a difficult fundraising environment in the $1.7 trillion private credit market may encourage funds to tap this new source of capital.
Though CPPIB's investment is a relatively small one in the context of the private credit market, it's a sizable compared to the typical check written for a private credit fund, where investors usually avoid investments that make up more than 10% of a vehicle. CPPIB didn't immediately respond to a request for comment.
The Canadian pension plan's investment marks progress toward a fully private securitization or middle-market CLO, said ThinCats Managing Director Ravi Anand. The firm has invested £440 million in the structure.
In the future the firm plans to operate structures with institutional investors, rather than banks, as the holders of the most senior tranches, he said.
ThinCats' loss rate on all lending is less than 50 basis points a year and this is in line with the structure's metrics to date, he said. The loans in the vehicle have an average leverage ratio of about 2.5 times earnings.
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