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Barings puts together first ever European middle market CLO
by Shant Fabricatorian
It’s been a long time coming, but the successful pricing last month of the first European private credit CLO marked a milestone in opening up the region to one of the CLO market’s most dramatic growth stories in recent years.
The problems of putting together a middle market CLO in Europe are well established. They include ensuring sufficient diversity of collateral; European requirements to have two ratings for every tranche; and the availability of competitive bank financing at attractive rates.
To that end, Barings EUR Middle Market CLO 2024-1 called for an unusually high level of collaboration between Barings as the manager, the arranger BNP Paribas and two ratings agencies, S&P and Fitch.
Joe Evanchick, head of the middle market CLO platform at Barings, said the firm got serious about the deal over the summer. “Probably the heaviest lift of the whole process was working with the rating agencies in Europe for the first time to get credit estimates on these names,” he said. Barings has seven middle market CLOs under management in the US, all rated by S&P, but that relationship was not an assurance the process would be identical across the Atlantic.
Evanchick: had to get credit estimates on nearly 50 private credit assets from two rating agencies
“The biggest learning process was in terms of having numerous back and forths on needing additional financials and documentation,” he said. “By the time we were ready to price this deal, we’d gotten credit estimates on nearly 50 private credit assets from two rating agencies.”
High levels of investor interest indicated to Barings that the timing was right. But Barings wore the risk of the deal not being viable. “If you do two dozen of these credit estimates and you don’t get the answers that you need to make a CLO work, at the end of the day, you’d have to pull the plug,” Evanchick said.
According to Aleem Akhtar, director of EMEA CLO primary at BNP Paribas (BNPP), the arranger saw three main hurdles to getting the deal done. The first was determining the viability of such a product in Europe. The second were issues that arose on the collateral side — questions around asset sourcing and portfolio construction. And finally, innovations were required on the structuring and rating agency side. In the latter respect, BNPP’s team found it useful to leverage the experience of their US middle market team.
Portfolio diversification was another challenge. Yet as Barings’ head of Europe and APAC private credit and capital solutions Stuart Mathieson puts it, you can’t solve for a lack of diversity in your capital base if it doesn’t exist in the first place.
“You either have diversity and scale, or you don’t,” he said. “Barings has a diverse capital base, and that’s allowed us to scale our platform. We have approaching 120 portfolio companies in Europe today. You need that kind of scale to filter out the names that are not going to be eligible collateral.”
The final portfolio included 61 obligors — 45 middle market names, plus 16 BSL obligors, spanning industries including healthcare, chemicals, software and construction, among others. While the BSL sleeve was not required, said Sahil Khanna, BNPP’s head of EMEA ABS syndicate, it helped ensure the deal was in line with the structure of US middle market CLOs, most of which have a BSL bucket of 15-20%.
The CLO is static, which makes the credit analysis easier for investors. It is also entirely denominated in euros, again to aid palatability for the market.
While the exact scope of the private credit CLO market in Europe is yet to be determined, the signs for growth are positive. As BNPP’s head of CLO origination and structuring Dushy Puvan observed: “There’s been a lot of focus and attention on the emergence of European private credit CLOs for a long time. Now the doors are open.”
