LONDON (Reuters) - Europe’s largest CLO managers are losing their influence over Europe’s leveraged loan market as more diverse streams of money flows into the space.
Underwriting banks are finding it easier to syndicate a wider range of deals on increasingly aggressive terms after a flood of liquidity from smaller CLO managers, managed accounts and participant banks that are happy to invest in TLB paper.
Pension funds and insurance companies are increasingly investing in leveraged loans via managed accounts, attracted by the returns in a low yield environment and the low default rates.
The emergence of a wider pool of liquidity has led to less reliance on the biggest fund managers, otherwise known as anchor investors, from banks and sponsors. In some cases, CLOs only account for a mere 30% of liquidity per deal compared to more than double that a couple of years ago.
“Three to four years ago you couldn’t do a deal without some of the big five in. I’m talking Alcentra, Barings, GSO, PGIM and KKR. CSAM are also pretty chunky as are M&G, ICG and CVC. Now the fire power of other funds has increased so the market influence of those bigger funds has waned slightly. More money coming into the sector has diminished the negotiating power of those anchor investors,” a syndicate head said.
New players and some of the previously less prominent funds are now able to put in ticket sizes of up €50m-€100m per deal.
Excess liquidity has prompted a supply and demand imbalance, leaving the biggest funds to wield less power.
The realisation and acceptance that the big managers can walk away from a loan they are displeased with, without having a major impact on the success of a syndication process, has given the big managers less influence over pricing, structure and documentation features.
“Anchor investors still have ability to sway a deal but they don’t have the same ability to sit in judgement on the market,” the syndicate head said.
A second syndicate head said: “All you have to do is look at documentation now to know that the biggest funds don’t have as much influence.”
Despite an increased presence in the market, no one has been able to quantify the precise size of managed account liquidity in Europe, as funds choose to hold their individual firepower close to their chest.
“We would love to know the size of the overall managed account market in Europe. We won’t divulge what we hold in managed accounts because we don’t want the banks to know just how much money we have to put to work,” a senior investor said.
The strength of the largest investors is not to be underestimated and when it comes to the larger loans, in excess of €800m, securing the support of anchor investors is still seen as crucial in order to get a deal away.
Underwriting banks will need to capture the attention of all the biggest funds in order to syndicate a €2.35bn jumbo loan financing backing private equity groups Bain Capital and Cinven’s buyout of German generic drugmaker Stada (STAGn.DE).
The composition of larger deals could be split 40%-50% CLOs, 40%-50% managed accounts and 5%-10% banks.
Yet anywhere up to €500m, the likelihood is that banks will be able to sell down a deal without the largest funds in play.
Sub-€500m, the composition of a deal could go up to 60%-70% managed accounts.
A new €300m covenant-lite term loan B for Europe’s largest lab operator Synlab reverse flexed to 300bp over Euribor, prior to close on September 12, after a successful syndication process. The order book was around €1bn at a launch price of 325bp over Euribor, but reduced to around half of that once pricing dropped to 300bp as it was too low for CLOs to play, sources said.
“While deals will go much better with anchors clamouring for tickets, a medium sized deal can now get done without any of those investors taking part,” the syndicate head said.
Anywhere between €500m-€800m and it is expected that at least a couple of anchor investors will be needed to get a deal away successfully.
The absence of anchor investors on some deals has left a hole for some of the smaller to mid-sized players to come into a deal and take a more prominent role, encouraging more money into an already liquid market.
“On the biggest deals it is hard to ignore the appetite and sentiment of the biggest beasts but there is no reason why smaller deals couldn’t be consumed by the more peripheral players that sometimes have to live off of the scraps,” the syndicate head said.
This is creating a new class of increasingly important investors, which are more active in both the primary and secondary loan markets as well as the bond markets too.
Some are starting to leverage off their ability to take smaller and perceivably more risky deals to get better allocations on the larger, higher quality ones.
Although the smaller deals can get done without the larger funds, ultimately their presence is still important.
“It is unlikely that you don’t get any of the really big guys and still have interest from all of the rest — they are sort of a bellwether for the rest of the market,” the second syndicate head said.
Editing by Christopher Mangham