November 21, 2018 / 5:12 PM / 19 days ago

European CLO market hits post-crisis high

NEW YORK, Nov 21 (LPC) - Issuance of European Collateralized Loan Obligation (CLO) funds has hit a post-crisis high and is on track to set a new annual record as more new managers enter the market.

More than €26bn (US$29.6bn) of European CLOs have been printed in 2018 so far, beating the previous post-crisis record of €19.2bn set in 2017, according to LPC Collateral data. An all-time record annual tally of €32.9bn was arranged in 2006 at the peak of the market prior to the financial crisis of 2008.

Wells Fargo increased its 2018 new-issue forecast for European CLOs to €30bn from €25bn in October.

“This is going to be a near-record breaking year, if not a record-breaking year,” said Jeremy Ghose, head of Investcorp Credit Management in London.

“The market is growing, the leveraged loan market is growing. I’m encouraged by the fact that global investors are looking much more positively and taking a longer term view in Europe than they have done before,” he added.

Europe has €93.1bn of CLO funds outstanding, which is set to rise as more credit managers raise new CLOs. The funds buy leveraged loans that companies including Danish telecom company TDC Group and global tea and coffee company Jacobs Douwe Egberts depend on to fund operations and back acquisitions.

CLOs have been buoyed by increasing global investor demand for senior debt and floating-rate loans, which offer some protection against rising interest rates.

FRESH BLOOD

More new managers have entered the European CLO market and are trying to grow their platforms, which has boosted issuance this year, according to Rishad Ahluwalia, JP Morgan’s London-based head of CLO research.

Anchorage Capital is among firms that issued their first European CLO this year, according to LPC Collateral data.

Monthly volume has picked up in the last two months with €2.4bn of European CLOs arranged in October, up from €1.6bn in September and €1.3bn in August, according to LPC Collateral data. Monthly issuance in 2018 peaked in July when €4.2bn of deals were arranged.

More than €3.2bn of European CLOs have been arranged in November so far, just behind the larger US market, which has seen US$3.7bn of the funds priced in the same time, according to the data. More than US$120bn of US CLOs have been arranged this year as of November 16.

“It’s a year-end rush to get deals done,” Ahluwalia said. “You’ve seen some slowdown in collateral – there’s been less loan origination – and arbitrage has gotten a little weaker, which makes dealflow a little harder to do. Managers are trying to get deals done in case widen out more year end.”

Spreads on the most senior tranche of European CLOs range from 96bp-103bp. Average spreads of 98.6bp increased 5bp in October from September, according to LPC Collateral data.

BUYING PRESSURE

While European CLO issuance is increasing, European loan volume is falling, which is leaving less for new funds to buy and fewer assets for arranging banks to put in warehouses.

In the third quarter, €29.4bn of Western European leveraged loans were issued, roughly half of the €60.8bn arranged in the second quarter, according to LPC data.

The Bank of England’s Financial Policy Committee warned about the global leveraged loan market in October, saying lending standards were falling and drew a comparison with the US sub-prime mortgage market that triggered the financial crisis.

While more regulatory changes for structured credit are expected in the New Year, the European CLO market has settled into risk-retention rules, which require managers to keep skin-in-the-game in an attempt to better align investor and manager interests.

“There are no legal roadblocks – people are comfortable with structures and have figured how to do deals in this regulatory environment,” said James Warbey, head of the alternative investments group in London at law firm Milbank, Tweed, Hadley & McCloy.

“People … want to squeeze in deals before year-end because we know there are legislative changes coming in the New Year,” he said. “There is a new legislative environment and that will inevitably mean that there is a certain hesitancy. It will be more time consuming to get deals done in the first few weeks of the New Year as people [get used] to the new environment.”

Despite spread widening and potential regulatory changes, deals are continuing to price and market participants are optimistic about 2019. JP Morgan on Tuesday said it expects €30bn of new European CLO issuance next year.

“I feel really comfortable about the European CLO landscape getting stronger and stronger, and deeper in terms of liquidity and in terms of the number of overall participants,” Ghose said. (Reporting by Kristen Haunss Editing by Tessa Walsh)

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