Going abroad: CBAM joins in European expansion trend
Following other U.S. CLO managers, CBAM Partners announced the hiring away from AXA Investment Managers an executive with significant experience in the CLO and European debt markets to assist in the launch of its European credit strategies business.
Jean-Philippe Levilain was the global head of loans and private debt at AXA, where he started work 14 years ago as a senior portfolio manager in Paris and in 2013 helped develop the firm’s U.S. CLO business. Previously, he worked at BNP Paribas in debt-related positions.
CBAM's press release did not divulge strategies the company would embark on overseas, but one of the company's primary U.S. focus has been in U.S. CLO issuance that has topped $11.4 billion in volume since 2017.
"CBAM's global expansion is essential as we broaden and deepen our investment capabilities in response to increasing client interest,” said Don Young, one of three founding partners at CBAM, which has grown rapidly since its debut three years ago and now manages $11.4 billion in assets, according to a release this week. CBAM Partners is portfolio company of private-equity firm Eldridge Industries, headed by former Guggenheim Partners president Todd Boehly.
Other U.S. asset managers launching European businesses include CIFC Asset Management and Angelo Gordon, both of which established CLO platforms. They both hired European CLO talent last year, with the former launching its debut European CLO in July. Ellington Management Group reportedly was planning an inaugural European CLO earlier this year.
Luke Millar, director and senior associate editor at S&P Global’s Leveraged Commentary and Data (LCD), said U.S. CLO managers are setting up shop in Europe primarily to diversify and grow their CLO platforms’ assets. He noted their first attempt several years ago was less effective because they sought to run those businesses from the U.S., but European investors wanted to judge their commitment face-to-face.
Millar said the market assumes today a manager needs to issue three CLOs for it to make economic sense, and that is probably one of the reasons Sound Point Capital launched its first-ever European CLO last spring and followed it quickly with a second one.
A more technical reason for U.S. managers’ interest in European CLOs today may be the zero-percent Euribor floor, making European CLO liabilities relatively more attractive to investors. Investors may foresee three-month U.S.-dollar Libor falling from its just over 2% perch, but returns on European liabilities are essentially frozen where they are. Even if Euribor drops even further into negative territory, a European AAA CLO tranche paying Euribor plus 97 basis points, for example, can drop no further because of the zero floor.
“Investors’ U.S. CLO liabilities will become less attractive versus European CLOs, because the latter are floored at zero,” Millar said.
European CLOs retain a risk-retention requirement that was revoked in the US last year, although Millar said that doesn’t appear to have presented much impediment.
“A lot of managers in the U.S. raised significant capital for risk retention, and after that was repealed they don’t want to give that money back, so this is one possible use for that funding,” Millar said.
Last year’s volume of €27.3 billion (US$30.15 billion) was a record, and year-to-date volume of €20.15 billion slightly exceeds last year’s, according to LCD.
The U.S. managers are arriving at a time of increasing concerns about the quality of European CLOs’ underlying loans. A Sept. 9 Bloomberg report noted that an increasing number of loans trading at a price of 80% of face value or lower, combined with concerns about a cyclical downturn are starting to worry investors.
Nevertheless, European CLOs may withstand a downturn. Fitch Ratings argued in a recent report titled “European CLOs Resilient to Credit Cycle Downturn” that its AAA-rated CLOs would avoid downgrades “even if faced with stresses similar to those experienced during the height of the financial crisis.”
The rating agency found that all the European CLOs rated before 2007 with similar profiles to today’s transactions performed well, and today’s deals have “significantly higher credit enhancement than pre-existing transactions.”