Despite a widening-spread environment, seven CLO managers – most with U.S. ties – are planning either debut or re-entry deals in an increasingly busy European collateralized loan obligation marketplace, according to Morgan Stanley.
In a monthly report issued last week, Morgan wrote that 15 primary-issue CLOs are backed up in what has been an otherwise dry pipeline for new-issue deals during May, following April’s deal volume level of €2.9 billion.
The expansion comes despite widening spreads on the senior AAA paper in global CLO deals, which widened last month in both the U.S. (from 98 basis points to 103 basis points above Libor) and in Europe (to 80 basis points in April from March’s 74-basis-point AAA coupon spread).
Even with the presence of risk-retention requirements overseas and rising credit-risk levels of issuers, U.S. funds are clamoring to expand to take advantage of Europe’s rising leveraged-loan and high-yield finance issuance levels.
In the first quarter, the Continent had its second-highest quarterly level of issuance since 2012 at $63.9 billion, according to Moody’s Investors Service. High-yield bonds – which, unlike in the U.S., are permissible investments in eurozone CLO portfolios – had issuance levels up 127% in March from the prior month, as well.
A major draw for managers is the lower-projected European speculative-grade defaults rate, which by the end of the year is expected to be less than half (about 1%) of U.S. non-investment-grade corporate borrowers (approximately 2.2%), according to Moody’s.
Some credit concerns are emerging. Moody’s, for example, said the number of first-time junk-rated European issuers with initial, highly speculative B3 ratings rose 30% in the first quarter from late 2016. But Morgan Stanley is not projecting any disruptions, maintaining a 2018 CLO issuance forecast of €20 billion.
Of those 15 new deals in the pipeline, seven involve managers with either a first-ever post-crisis European CLO deal in the works, or – in the case of Hayfin Capital Management – a first-time broadly syndicated euro CLO (Hayfin Emerald CLO) after its 2017 acquisition of U.S.-based Kingsland Capital Management and prior involvement in euro-denominated midmarket corporate loan securitizations.
Debut managers expecting to price deals in the European market include King Street Capital Management, CIFC Asset Management, Fair Oaks Capital, Sound Point Capital Management, Credit Value Partners and Neuberger Berman, according to Morgan.
Once these managers print deals, the total manager count of European “2.0” CLOs will reach 49, Morgan reported.
Fair Oaks, Neuberger Berman and King Street are the only debut managers with deals active in a suddenly busy European CLO pipeline. Angelo Gordon is another CLO management firm that published reports have tied to interest in European CLO expansion, but Morgan’s report did not cite any active or proposed deal.
Other deals set to price soon include Accunia European CLO III; Barings Euro 2018-2; Credit Suisse’s Cadogan XI; Cairn CLO X; Carlyle Euro CLO 2018-2; Contego CLO V by Rothschild’s Five Arrows Managers LLP; CVC Cordatus Loan Fund XI; PGIM’s Dryden 62; GSO Blackstone’s Milltown Park; and an unnamed deal through global asset manager Pinebridge Investments.
CIFC’s debut European CLO coincides with the company’s announcement on Monday it was hiring former Muzinich & Co. executive Joshua Hughes as new head of European marketing to lead fundraising efforts in establishing its European investment platform. CIFC is one of the largest U.S. CLO managers with $17.2 billion of corporate loan-based assets under management. The company has priced one U.S. CLO in 2018 (the $1 billion CIFC Funding 2018-1).
Sound Point, which has a registered UK affiliate, has $16.6 billion of U.S. assets under management, including 18 U.S. CLOs since 2013. Sound Point’s most recent deal was the $510 million Sound Point CLO XIX issued in March.
Credit Value Partners, of Greenwich, Conn., is an indirect affiliate of New York Life Investments that launched in 2010 as a spinoff from Credit Suisse. The company manages $2.2 billion across four CLOs it has issued since 2013 – the most recent its $408.7 million CVP CLO 2017-2 deal that priced in December 2017.
King Street’s first-time European deal will be just over a year after the global distressed debt fund manager marketed its first U.S. CLO (the $507 million Rockford CLO 2017-1).
Fair Oaks, with offices in London and New York, has a European mutual fund offering investments in CLOs, and operates investment funds that buy control equity positions in U.S. and European CLOs, as well as “tactical” CLO mezzanine investments, according to its website.
Neuberger Berman, which is issuing Neuberger Berman European CLO, is an active U.S. CLO manager with 17 deals issued since 2012 – including two deals totaling more than $1 billion in 2018 adding to its portfolio of $10.2 billion in CLOs under management.
Although the CLO would be the New York-based firm’s first European managed deal, Neuberger has a passive 20% interest in Halcyon Capital Management, which oversees two European CLOs through affiliate Halcyon Loan Management.