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CSO pipeline strengthens following ESG breakthrough
July 2021 | Issue 236
Dan Alderson
Deputy editor
ESG criteria and longer investment horizons are driving new business in a resurgent bespoke tranche market, say dealers. And while this is unlikely to get 2021 near to a 2019-like haul of deals by year end, hopes are high that volume is firmly back on an upwards trajectory.
“New business resumed earlier this year with BNP Paribas bringing several new deals to the market,” says Guillaume Mear, head of structured credit trading at BNP Paribas.
“As for most asset classes, investors are finding it hard to get excited in the current spread environment. However, with the expectations of volatility remaining low, the pipeline is growing and we are working on multiple transactions.”
The bespoke tranche market is thought to have reached something like $65 billion in 2019, before falling away precipitously in 2020 due to the onset of the covid-19 pandemic. Even before that roiled CDS markets, yearly deal printing had fallen from $80 billion or so in 2018, amid eye-wateringly tight spreads, but 2019 business still surpassed the $55 billion issued in 2017 and went well beyond 2016’s $20 billion.
Credit spreads are near record tights. But hopes that ESG factors could prove key to bringing CSO business back to former levels appear to be coming to fruition, with the first ESG-compliant deals being penned in recent weeks and more in discussion. Bespokes have an opportunity to take a lead, traders say, since they may be more suited to achieving specific regional or thematic objectives than standardised benchmarks.
“With expectations of volatility remaining low, the pipeline is growing”
Guillaume Mear, Head of structured credit trading | BNP Paribas
“ESG is finally here,” says Mear. “Bespoke CSOs allow investors to filter their portfolios in order to match their ESG targets. In one of our recent trades, the equity investor was able to filter their portfolio against The Carbon Underground 200 and MSCI databases.”
While spread compression is leading many investors to reach for yield, the balance of the bespoke investment universe remains tilted towards investment grade. Instead, three- to five-year tenors are becoming the norm rather than two-year CSOs, and conversations are turning once again to the merits of portfolio substitutions over the life of a trade.
“Clients seem to favour extending duration rather than going down the credit spectrum,” says Mear.
Along with 2020’s spread blow-out and mark-to-market trauma, CSO primary volumes also dropped due to increased secondary market activity, as investors found lucrative opportunities to source paper. Secondary market trading of CSO tranches has once again been strong out of all inventories in the first half of 2021, say dealers.
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Global credit funds & CLO's
July 2021 | Issue 236
Published in London & New York.
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