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Global credit funds & CLO's
April 2024 | Issue 263
Published in London & New York.
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News
News in brief
News in brief
April 2024 | Issue 263
2022 vintage deals score again as COLF is called with 49% gross IRR
One of the European CLO market’s most interesting deals has been called, according to market sources. CVC Credit Partners redeemed its Cordatus Opportunity Loan Fund (COLF), a EUR 500m long-term financing facility structured similarly to a CLO, before Easter. The deal had a gross multiple of money of approximately 1.48x, and a gross IRR of around 49%.
COLF was originally privately placed in October 2022. It employed a long-term warehouse with RBC as the senior lender. It also included a strategic third-party mezz/equity investor, and CVC CLO equity funds as equity investors. It was then reissued a couple of months ago as a static deal.
Now, with asset prices having rallied significantly in the intervening period, market sources said this allowed for strong returns for the CLO equity fund to call the deal. The structure of the CLO meant it was possible to draw down the liabilities when assets were settled, reducing the cash drag typically faced in a traditional CLO.
“Raised amidst challenging capital markets, COLF is a strong example of how CLO equity capital can be put to work in innovative ways to acquire high quality assets at attractive prices during market dislocations,” said Guillaume Tarneaud, CVC’s head of European performing credit.
The European market has seen redemptions pick up in 2024 after a slow 2023. According to our data, last year saw just four European CLOs redeemed, although some delivered strong returns. For example, the 2022 vintage deals Sound Point Euro CLO IX and RRE 14 CLO both generated outsized IRRs.
EU managers seeking retail investors roll out first ELTIF 2.0 credit funds
Asset managers have been quick to capitalise on new European fund regulations that make it easier for individual investors and the affluent wealth channel to tap into credit.
The launch of ELTIF 2.0 funds is in full swing after the regime was rolled out in the European Union in January, but managers have been cooking up funds with 2.0 compliance since 2022.
“ELTIF is a way of getting loans to retail investors, which in Europe has been pretty difficult,” said Christian Parker, a partner at Paul Hastings Europe.
European loan managers seeking to emulate how, in the US, loans are available to retail investors through BDCs, have tried to use UCITS funds. But the UCITS platform was never intended to support investment in sub investment grade loans.
Another advantage of the new ELTIF wrapper is that it can potentially be transferred between different member states in the EU.
Along with a couple of private equity funds, one of the first examples of an ELTIF 2.0 credit fund launched in late March in the form of the Zurich Private Debt ELTIF. The joint venture between Zurich Insurance Group and Pemberton Asset Management provides individual investors and life insurance customers in Europe with access to the private debt market. Parker’s firm advised Pemberton.
Still, there are obstacles. ELTIF 2.0 remains a highly-regulated regime that requires a sophisticated platform, and scale is hard to achieve in retail funds. “To get to a fund that’s EUR 1bn in size... you’re probably looking at 10,000 investors. Managers need a distributor,” says Parker.
US regulatory capital deals are increasing — and not just for big banks
Last month’s IMN SRT Symposium in London was sold out, a reflection of the blossoming market for significant/synthetic risk transfer trades. Also known as reg cap deals, these transactions enable banks to reassign future credit losses in reference loan portfolios to third-party investors. Under Basel 3, this can significantly reduce bank capital charges, and has become a core tool for European banks to manage their credit portfolios.
But what had investors at the conference buzzing wasn’t the growth of the European market, but the thought that the US giant may finally be awakening.
At a panel dedicated to the subject, Terry Lanson, a managing director at Seer Capital Management, explained the surge in interest. “At the end of September 2023, the famous Fed statement came out clarifying that SRT deals are allowed under the current capital regulations… the Fed FAQ triggered a massive wave of pent-up supply, with more than USD 7bn of risk placed by US banks in 2023 alone,” he said.
As Mark Kruzel, senior vice president, bank capital markets at PIMCO, pointed out, the opportunity in US SRT isn’t just for the largest banks. “Even though the [regional] banks are probably looking at a somewhat challenged environment on earnings outlooks for the next several years, their assets are still high quality in many parts of the balance sheet.”
An example of a regional bank doing these trades is Merchants Bank, which, despite having a small balance sheet of just under USD 17bn total assets, completed two reg cap trades in the last few years, worth USD 2.3bn.
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