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April 2022 | Issue 244

Appetite for CLO warehouse investing increases in Europe

Sayed Kadiri headshot
Sayed Kadiri
Michelle D'Souza headshot
Michelle D’Souza
The investor base for European CLO warehouse risk has grown in the past few months, and is supporting the increasing number of CLOs where the equity tranche has come from widely syndicated sources.
Typically, warehouse equity investors have the option but not the obligation to roll their investment into the CLO when it prices. Sources say that Acer Tree, Alcentra, BirchLane, Napier Park and Orchard Global are among the investors in this area.
“Warehouse investing is becoming more mainstream in Europe,” says Shawn Cooper, portfolio manager responsible for ABS and CLO investment at Orchard Global Asset Management.
“The IRRs can be as high as 30%-plus, but the money multiples are low, so you need to have several warehouses open simultaneously to maximise cash returns,” he adds.
“You need several warehouses open simultaneously to maximise returns”
Shawn Cooper, Portfolio manager | Orchard Global Asset Management
In the US, warehouse CLO investing is much more widespread, but market participants agree that Europe is following a similar course.
A portfolio manager at a credit hedge fund says that he likes the short-term nature of warehouse investing. His motivation is to partner with experienced CLO managers to create strong portfolios by exchanging trade ideas.
However, he believes that the strategy is less enticing at present because of costs. “The cost of hedging increased in March as the credit indices widened, while loans did not move to the same extent,” he says.
London-based Cooper says that one of the changes of late has been that warehouses may consist of multiple third-party investors or even mezzanine tranches.
“Non-vanilla warehouse investing is not widely done — typically, it may happen during phases of stress or if the senior lender requires higher attachment points,” he says.
“Often there will be one large equity investor which seeks to have more control of rights and decisions over individual assets.”
The biggest risk associated with CLO warehouses is that the take-out into a CLO does not happen. But Cooper points out that even during the volatility in March 2022, loan prices only dropped a few points, which compares favourably to the 20-point slump in March 2020.
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Global credit funds & CLO's
April 2022 | Issue 244
Published in London & New York.
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