Lack of Loans Still Holding Back European CLO Market

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The biggest impediment to the recovery of the European CLO market is the lack of loan issuance in the region, according to panelists speaking at an industry conference Wednesday.

After a drought of several years, a few European collateralized loan obligations have come to market this year. In February Cairn Capital issued a €300 million deal; Apollo Global Management and Pramerica Investment Management are also said to be marketing European CLO.

Analysts at JPMorgan Chase are forecasting issuance will reach between $3 billion and $5 billion this year.

Issuance of European CLOs came to a halt during the financial crisis as spreads on bonds issued by these deals ballooned, making them an uneconomical way to raise money. The introduction of a regulatory requirement for managers to retain exposure to CLOs has discouraged the formation of new structures.

Andrew Burke, a senior portfolio manager at Cairn, said it was the dramatic improvement in the pricing of debt issued by U.S. CLOs in late 2012 that provided the catalyst for the deal his firm priced in February. When spreads on new issue U.S. triple-A tranches fell below Libor plus 150 basis points, spreads on triple-A tranches of European deals trading in the secondary market narrowed in sympathy.

Once these spreads reached the 175-200 basis point area, Cairn felt more comfortable talking to investors about a potential deal, Burke said at IMN’s annual conference on CLOs and leveraged loans.

While pricing has improved, Burke and other panelists agreed that the dearth of commercial lending in Europe is still a big impediment to CLO issuance, because there is a dearth of potential collateral. “If you see a significant uptick in loans, you’ll see a significant increase in CLO issuance,” Burke said.

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