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Atlas SP joins new CLO arrangers vying for growth as sector booms
by Shant Fabricatorian
Apollo Global Management affiliate Atlas SP has joined the ranks of CLO arrangers, adding to the burgeoning number of new entrants eager to get into the lucrative business of putting together and selling the securitised products. But the arranging arena is crowded and there’s no guarantee of success.
The past 12 months have seen an upturn in interest and activity from new firms looking to earn fees from arranging CLO deals. Besides Atlas, the likes of Canadian firms CIBC and Scotiabank, and Spanish bank Santander, have entered the space. British bank NatWest has also sought to re-establish itself as a presence, having acted as a co-placement agent on a number of deals over the past year.
The CLO market, investors and managers alike, generally welcome an influx of new competitors in the arranging space, as it helps drive down fees. Still, the number of arrangers with significant market share is low because, as in most aspects of the CLO market, there are high barriers to entry. For newcomers, it’s an uphill slog against established names such as Citigroup, Bank of America, JP Morgan, BNP Paribas and Jefferies.
“It’s tough for new entrants,” said one portfolio manager who focuses on European CLOs. “At a high level, Europe is relatively overbanked. There are 10-plus arrangers, so the opportunity for new entrants to differentiate themselves is somewhat limited.”
For new arrangers that may be relatively inexperienced in dealing with CLOs, a vital question from managers invariably revolves around their ability to sell and distribute CLO liabilities. In addition, managers may seek assurance about the effectiveness of a bank’s secondary desk in helping out with loan and bond trading. Experience counts — that’s why it’s common for new entrants is to try to secure well-known and well-regarded personnel from established arrangers.
The fall of Credit Suisse, and its previously substantial arranger business, set off a merry-go-round of staff movements, with many of the recent entrants hiring people with solid reputations. Recruiting well-known names also helps reassure managers that are looking to minimise execution risk.
For Brad Larson, MD and head of structured products at CIBC, putting in place an experienced team was a core priority when moving into CLO arranging, as demonstrated by the bank’s recent recruitment of Patrick McKee, who has joined as head of structured credit sales from GreensLedge. But just as important in driving CIBC’s success — it has priced 17 transactions since the start of the year — has been the bank’s financing capabilities, and its ability to carry assets on its balance sheet, especially triple As.
“Differentiation is important, and triple As are just one example for us,” said Larson. “While we’re nowhere close to maturity, I think we’ve established ourselves as a legitimate participant in the market.”
According to one London-based lawyer who works closely with arranging banks on CLO deals, a crucial differentiator between new entrants is the warehouse terms on offer. “You need to have access to a balance sheet that allows you to offer a competitive warehouse, and ideally, you need to be able to offer a balance sheet [that allows you] to buy into at least the triple As, if not certain other parts of the capital stack,” he said.
Moreover, to beat out rivals, new arrangers also need an effective sales team, as well as the ability to offer managers loan supply on favourable terms. “Put all that together, and it’s a very tall order,” the lawyer added.
For most new entrants, some part of that cocktail is typically missing. One way they may compensate is by working with more established managers, whose market share may render an active loan supply less important.
Notwithstanding the significant challenges, the current busy state of the market presents opportunities for fledging arrangers, since bigger desks won’t necessarily have the capacity to take on new deals. With demand from managers and investors remaining strong, both new and established arrangers look set to benefit.
There have been successful new entrants in the past. Jefferies shot up to the top spot in Europe from practically zero after the investment bank poached Citigroup’s Laura Coady to ramp up its arranging business.
