Despite CLO gloom in Europe and greater take up of private credit in the US, markets on both sides of the Atlantic are similar

Tom Davidson

Managing editor Creditflux

Developments on the other side of the pond will cross over in the end

I’ve just returned from a trip to London, my first since taking on the mantle of editing Creditflux, and was struck as always by how stubbornly far apart the European and the US markets remain.

Before getting into that though, this seems like a good opportunity to remind our readers that, despite my accent, I’m actually based in New York, and have been for almost a decade. In fact, the majority of our editorial team are now in the US. That feels like a development that finally corrects the historical oddity of our covering the global credit markets while being based almost entirely in London.

But enough navel gazing, and on to the US vs Europe. In the CLO market, the difference in market sentiment on my trip was palpable.

Optimism in the US — gloom in the UK

Talking to US managers this month, the overall feeling is tempered optimism. Large managers are busy with a heavy pipeline of both new issuance and resets and refinancings of older deals. As manager tiering continues to narrow (see page 1), small and mid-sized managers are joining in, and everyone is hurrying to get at least one deal put away before the end of the year.

London, in contrast, was gloomy despite the bright sunshine flooding the City. The talk from managers was of challenging conditions, tricky arb, limited issuance and that old chestnut: “We’re not the kind of manager that needs to price CLOs, we wait until the conditions are right.”

What are the reasons behind this divide? It’s always tempting (particularly for Brits) to flag it as being down to American over-optimism versus European realism. But I’m not sure that’s true in this case. It remains a fact that economic sentiment is very different on the two sides of the Atlantic. In the US, the talk in the financial markets is about a soft landing (even if economists remain unconvinced the Fed can pull that off). In Europe, sentiment seems to linger on dark clouds, recessions (technical or not) and the impact of war.

For CLOs there’s also the critical question of loan supply, the other side of the arb discussion that can sometimes be lost in the exciting chatter of which banks are buying which triple A notes. I was surprised at how negative some European managers were on that front, with one telling me: “It’s f*%$ing terrible at the moment Tom.” The reasons for the lack of European supply are pretty old hat now: not enough M&A, and especially not enough LBOs, leading to a lack of issuance. I’m not sure I see an easy solution to that.

Oddly, when you move beyond the collateral, the European and US CLO markets felt more similar than I remember. Liability spreads are pretty much on top of each other. That European need for risk retention capital? The US market is all about captive equity these days. US-style restructuring language? It has been enthusiastically imported into European docs.

In some ways this is a reflection of how sophisticated and international the CLO market has always been. From the start, our industry was global, and to this day European investors are prominent consumers of US paper, as long as regulations don’t get in the way. It’s also an approach that Creditflux has always taken, providing coverage of both markets for all subscribers, as well as the only really global CLO conference (in London on 15 May 2024, just in case you’re wondering).

Our other big editorial focus these days is the private credit market, and again, while there are structural similarities, there are also differences.

Europe lags in private credit

Direct lending is growing quickly in Europe, and large managers can raise plentiful funds. But it remains a long way short of the US middle market, where direct lenders have been the dominant force for years. Over here the focus is on large club deals directly competing with the BSL market. That seems to be a trend that isn’t going anywhere. But I didn’t speak to anyone in London who views direct lending as a challenge to the European public debt markets.

Beneath the surface, there’s little that divides European direct lending and US private credit. Our columnist Randy Schwimmer has delved into the nuances of the two markets many times here in Creditflux, but they do always feel like nuances.

So what were my takeaways from the trip? First, that I need to get over to London more often to really take the pulse of both markets. Second, that there are headwinds at the moment for European credit, but nothing insurmountable. And finally, whether you’re in direct lending, leveraged loans or structured credit, there’s far more that unites us than divides us. Keep an eye on developments on the other side of the pond — the chances are they’ll come across to your side in the end.

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