Barings completed Europe's first middle-market CLO in late November, a €380 million ($395.7 million) transaction arranged by BNP Paribas, that comprised primarily senior middle-market loans residual 13% share of BSLs.
Investor demand for CLOs overall last year suggests more middle-market CLOs in Europe will follow in 2025.
Demand for the bonds was strong, with reverse inquiries into lead arranger BNP Paribas by both US and European investors and a mix of institutions, according to PitchBook. That demand comes near the end of a record year for CLO issuance in Europe, which topped €43 billion in 2024, up from €26 billion in 2023.
CLO issuance in Europe is small compared to U.S. issuance, which as of November had reached a record $192 billion in new issuance, according to S&P Global. Nevertheless, the rapid CLO growth in Europe this year indicates sufficient investor appetite for the bonds to warrant more middle-market deals.
"We are aware there are managers who would like to do one as they have investor appetite, but it's a matter of there being a sufficient pool of assets to utilize so the economics work," said Arlene Allen, who heads European CLO business for US Bank, a top provider of trust and administration services to CLOs globally and the trustee on the Baring deal. "Now that we're seeing middle market CLOs come into the European market, it means the CLO product has really gone mainstream."
Allen said that interest rates dropping quicker than anticipated in Europe were likely an important factor in investor demand for CLO paper, given its premium over other comparably rated, floating-rate products and its resilience during volatile periods. She added that the Barings transaction has essentially set a benchmark for middle-market CLO transactions in Europe.
A static deal with no reinvestment period, Barings CLO's AAA tranches priced at 147 basis points over Secured Overnight Financing Rate (SOFR), providing an additional 40 basis points compared to a static BSL CLO, according to PitchBook, with the single B notes pricing at 1,050 basis points over.
Fitch Ratings and S&P Global Ratings rated the deal. Fitch noted that most of the loans are not syndicated, and Barings is the only lender.
"While the European direct lending market has grown in recent years, liquidity is still limited, increasing the likelihood that borrowers will refinance or extend their loans with Barings," Fitch said.
Barings, a subsidiary of insurer MassMutual, is a global asset management firm with more than $431 billion in assets under management, pricing 12 new-issue CLOs in 2024. The firm has been active in the private credit market for more than 30 years.
