European CLO pipeline thins as investors wait for stability

Michelle D’souza

Reporter

The European leveraged loan and CLO market has yet to regain momentum following the start of the Ukraine-Russia conflict, with investors pointing to a thin immediate CLO pipeline.

As Creditflux goes to press, sources say Intermediate Capital Group is marketing ICG Euro CLO 2021-2 (a three-year reinvestment new issue with triple As at 115 basis points over Euribor); KKR has paired with Morgan Stanley (Avoca CLO XXVII); and BlackRock is marketing Blackrock European CLO XIII via Bank of America.

Many CLOs, however, are getting pulled, while other managers have already opted for shorter non-call and reinvestment deals. “It’s tricky because if a manager ramps too fast with these expensive liabilities in the market and the market tightens, they are again stuck in a situation in which they don’t want to be,” says one investor.

Gina Germano, head of European high yield and syndicated loans at Hayfin Capital Management, says primary loan issuance has slowed considerably and there is likely to be a lot of pent-up supply.

However, she adds that the market still needs to see some stability for CLOs to resume printing at normalised levels.

“We need to see some positive news for that to improve”

Gina Germano, Head of European high yield and syndicated loans | BNP Paribas

European loan issuance plunged to $19 billion (32 transactions) in the first quarter, a 69% year-on-year drop from $62 billion in Q1 2021, according to Creditflux’s sister publication Debtwire. No deals launched into syndication in March (aside from add-ons with existing lenders).

“I think if we see some sort of resolution to the Ukrainian conflict or a stable pattern, the market could revert to the inflation and rates scenario, and even go back towards early or mid-February levels,” says Germano.

“Right now, people are less nervous than previously. That’s already driven loans from -2% to now being down 50bp year-to-date. That’s a big move, but US CLO triple As are still indicated at the wides, having moved out progressively. We need to see some positive news for that to improve.

“On the other side, if events worsen on the geopolitical front, we may go back to the wides of late February, if not worse, depending on the magnitude of the event.”

However, Germano believes the market oversold on rates expectations and the inflation outlook through February and March, particularly in Europe.

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Global credit funds & CLO's

April 2022 | Issue 244

Published in London & New York.