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Euro regulators remain cautious about CLO ETFs
by Shant Fabricatorian
The launch in September of Fair Oaks’ debut European CLO ETF was welcomed as a positive step for the industry, since it followed the US lead in attracting a more diverse investor pool. But there’s one group whose enthusiasm for CLO ETFs remains muted — regulatory agencies.
Fair Oaks spent approximately 12 months bringing its Luxembourg-domiciled triple A-only fund to market. But according to sources, regulators have turned down proposals from other managers for ETFs that include mezz tranches.
Regulators pay attention to the liquidity of assets in products such as CLO ETFs, and, in particular, how liquid they would prove in a stressed situation, said Matthias Kerbusch, a partner at Dechert in Luxembourg. Along with Ireland, Luxembourg is one of the two main sites to domicile ETF products in Europe.
Most European investors can only invest in risk retention-compliant transactions
Miguel Ramos Fuentenebro
Partner
Fair Oaks Capital
“I think the position of the regulator, at least here in Luxembourg, is more generous than those of regulators in other countries, which do not permit any type of CLO UCITS with only exposure to CLOs — but that comes at the price of being a triple A product,” he said.
However, Kerbusch noted that “greater clarity” will emerge with the forthcoming review of the UCITS Eligible Assets Directive. The likelihood is that regulators will become less conservative over time as CLO ETFs become better understood.
Other managers that are understood to have expressed interest in these products include PineBridge Investments and Janus Henderson.
Director and lead analyst at S&P Global Ratings Rebecca Mun noted that, while CLO ETFs are likely to have the positive effect of stimulating increased demand, if demand truly takes off, then the industry may need to be wary of its own success.
“If demand grows too rapidly, there is a question over the impact on CLO spreads and whether the market can absorb the demand, given the level of loan supply,” she said.
“There is also potential increased price volatility. Given the complexity of the CLO product, there will certainly be a need for increased education for new investors to the market.”
For the moment, however, Miguel Ramos Fuentenebro, a partner at Fair Oaks Capital, is keen to emphasise the prospects for growth.
“Most European investors can only invest in risk retention-compliant transactions. So even if you wanted to expand a European investment to the US, you would be limited to US transactions which are compliant. That’s one of the challenges that face investors.”
