Like many of his peers in the European leveraged loan market, Don Procter, chief investment officer of London-based investment management firm New Amsterdam Capital Management (NAC), believes that the unprecedented growth in the asset class should be viewed with some caution.
The large volume of loan issuance and the concurrent rise in the number of investors participating in the loan market in Europe have resulted in tighter spreads and have put pressure on both leverage ratios and deal structure, Procter said. As such, average credit quality has declined, and dedicated investors must be more careful when making their choices.
All things considered, the European leveraged loan space is more attractive than its U.S. counterpart, Procter said. And for the foreseeable future, it will continue to attract new players, eager to get a taste of what it has to offer.
Indeed, Procter and his team have waded into the European loan market by launching the firm's first collateralized loan obligation, the 400 million Mercator CLO I, in early March. The transaction, which was upsized from a planned 350 million on account of strong demand from investors, is a natural step for NAC, Procter said, given the success the firm has had with its existing European loan fund, the 800 million NAC European Credit Fund.
NAC's new CLO is one in a long line of European CLOs that have emerged in the past year. Both Europe-based managers as well as new entrants from the U.S. have been putting together CLOs, Procter said, which has added more pressure to a market that is already under pressure. That being said, NAC still decided to launch its first CLO because European loan supply continues to abound. And for experienced loan managers like NAC, the business is still full of opportunity, Procter said.
"We decided to put together a CLO because we saw there was sufficient product to feed it," Procter said. "The CLO is a natural extension of what we have been doing with the fund. We have all the necessary systems and people that are needed for a CLO in place because of the [existing loan] fund, so it was a natural progression for us."
Mercator CLO I is collateralized by a pool of European senior leveraged and mezzanine loans. Eighty percent of the pool is denominated in euros, and the remaining 20% is denominated in pounds sterling. Bear Stearns was bookrunner on the deal, while The Royal Bank of Scotland served as co-manager on the placement of the notes.
A deal-by-deal investment approach
NAC follows a strict, bottom-up approach to investing in the European leveraged loans space. "We look at each credit carefully and if it does not meet our investment goals, then we simply do not invest in it," Procter said. "We do have views on certain sectors, overweighting some and underweighting others, but our basic approach is deal-by-deal, because even in out-of-favor sectors, there are still gems to be found."
The beleaguered auto sector, for instance, is one area where NAC has found some worthwhile companies to invest in. Retail, too, has yielded some good opportunities, he said, and there are several other areas in which investors can find great stories if they are prepared to dig hard enough.
As is normally the case for CLOs, although Mercator CLO I is closed, the proceeds of the note issuance have not yet been fully invested by NAC. Once the cash is fully invested, and the CLO establishes a track record, NAC may begin to look at the possibility of putting together a second CLO vehicle, Procter said. However, this being the firm's first CLO, the team is focused on seeing it up and running as smoothly as possible before undertaking its next venture.
NAC was set up in 2002 by Procter, John Seal and Jeroen Zuurmond, all of whom had extensive experience working with loans. Procter spent 15 years at SG Warburg (now a part of the UBS empire), while Seal and Zuurmond both worked at Barclays Capital, with previous stays at ING Barings and Bankers Trust, respectively.
NAC is an independent company - a rarity among CLO managers - as most other managers are a part of larger firms.
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