ESG template fires up hopes of CSO issuance

Dan Alderson

Deputy editor

2021 may not have been a year of big volume in the synthetic bespoke market, but primary business is back, and decisive inroads into environmental, social and governance (ESG)-focused issuance bode well for 2022.

There has been as much as $15 billion worth of CSO transactions in 2021, say sources. This is a far cry from the $65 billion notional of bespoke tranche business in 2019, not to mention the $80 billion or so in 2018. But while this year’s headline number largely replicates that of 2020, the vital distinction is that it stems entirely from new issuance.

“We are seeing some renewal of the investor landscape for synthetic bespoke tranches,” says Guillaume Mear, head of structured credit trading at BNP Paribas. “New investors are gearing up to get involved. For now, most discussions are focused on the three-year tenor.”

BNP Paribas, Citi and JP Morgan have continued to support the CSO market since March 2020, and sources suggest the three banks have had a fairly equal split of arranging business this year. Citi once enjoyed a 60% dominance, but BNP Paribas and JP Morgan had cut that to 40-45% versus their 20-25% apiece by the end of 2019.

“We are seeing some renewal — new investors are gearing up to get involved”

Guillaume Mear, Head of structured credit trading | BNP Paribas

The structure of the market could be re-examined in 2022, with ESG criteria looking set to be one of the biggest drivers of CSO new issuance. Around the start of November, Zais Group and BNP Paribas partnered on a first-of-its-kind ESG deal (dubbed Glasgow) that could lay a template for future transactions.

“The ESG trade set a precedent for credit with the rating agencies and received a lot of attention from clients,” says Mear. “Investors want to understand the methodology and educate themselves. There is still some room to go for credit on the ESG front versus the equity market, for instance, where labels and standardisation exist.”

This change of approach implies CSOs will have very different portfolios, return profiles and anchor investors.

“Up to now the bespoke market has been weighted towards high yield,” says Mear. “The ESG approach is geared towards investment grade. This could mean the array of equity investors may be different, looking at more junior tranches on better quality portfolios.”

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Global credit funds & CLO's

January 2022 | Issue 241

Published in London & New York.