CLO managers laud market’s shift away from direct lending

Tom Davidson

Managing editor

This year’s annual SFVegas shindig had a record 8,900 registered delegates, and every CLO panel included a discussion of two key themes. One that will be familiar for every Creditflux reader was the dramatic pace of the US CLO primary market this year, which is outpacing even the most bullish banker’s forecast. The other theme was the highly publicised fight between the broadly syndicated loan space and private credit lenders.

If speakers were worried about private credit eating into the leveraged loan market, they’re not now. Wellington Management’s Neil Delap summed up the sentiment: “The balance between private and public credit is a pendulum. Last year it swung towards private credit. But there are costs as well as benefits in doing private credit. We’ll end up with a healthy balance between the two markets.”

Despite talk of balance, there was relief that the pendulum was swinging back this year towards leveraged loans, at least for better performing names.

Lauren Law, portfolio manager at Octagon Credit Investors, said: “The private credit and leveraged loan markets are complimentary. Today, the BSL market is back open and it is the cheapest form of financing available for borrowers. But there are still situations where the flexibility that private credit provides can be more suitable, like for companies that need PIK financing.”

“The BSL market is the cheapest form of financing available”

Lauren Law, Portfolio manager | Octagon Credit Investors

The discussion wasn’t entirely competitive. Jian Hu, managing director at Moody’s Investors Service, developed some themes from a recent report that pointed to the similar performance of both asset classes.

“There’s been a lot of discussion about the behaviour of credit estimates compared with public ratings, but our data shows them performing very similarly,” he said. “The downgrade rate of single-B equivalent credit estimates averaged a little higher at around 11.8%, compared with 8.2% for single-B public ratings over the period of 2012-22. But the average notches were only 1.3 for credit estimates, versus 1.8 for public ratings during the same period.”

Josh Eisenberger, head of US CLO management at Sculptor, said that many refinancing transactions that his firm rejected last year ended up being taken out by private credit.

“But early this year, things in the issuance market seem to have swung back the other way,” he adds. “Competitive tension is key for borrowers in the credit markets and they will naturally gravitate toward the market that suits them best. Recent reports on the death of the broadly syndicated loan market couldn’t be more wrong.”

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