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Global credit funds & CLO's
March 2024 | Issue 262
Published in London & New York.
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March 2024 | Issue 262

European CLOs are pricing this year but market is falling further behind US

Shant Fabricatorian
Talk at SFVegas last month centred around the record-setting pace of US CLO issuance in 2024. In contrast, discussion around Europe was muted, reflecting the underwhelming sentiment around that market.
The numbers suggest this sentiment doesn’t tell the whole story. While the lack of loan supply remains an important limiting factor, the European primary market is nonetheless running well ahead of the numbers posted in 2023. By the end of February, three times as many European CLOs had priced compared with the equivalent period last year.
Nevertheless, Europe does seem to be drifting further behind the US. As a long-run average, the European market prices roughly one deal for every five in the US. But with Europe accounting for 21 of the 141 deals that have priced so far in 2024, this ratio seems to have slipped closer to one in seven.
As in the US, European spreads have come in considerably since the end of last year, from around Euribor plus 170bps, to the current benchmark of around Euribor plus 150bps. Multiple deals have now priced at the 148bps level. But market sources suggest there is insufficient pressure to drive the market significantly tighter from its current benchmark in the near term.
“We need those triple-As to come in a little bit tighter”
Shawn Cooper, Senior portfolio manager | Orchard Global
For equity investors, the recent tightening has not been sufficient to rectify challenges with arbitrage. “It’s the all-in cost of financing for the CLO that matters,” said Shawn Cooper, senior portfolio manager at Orchard Global.
“Even with the increased new issuance that we’re seeing this year over last, we still find that arbitrage to be challenging, even at current levels. We need those triple-As to come in a little bit tighter, or the new issue loan market to be at wide enough spreads to make the arb work.”
Underlying macroeconomic concerns in Europe have also contributed to conflicting US and European sentiment.
“Increasingly over the last couple of years, you’ve really seen this divergence between US and European growth,” said Michael Schewitz, a portfolio manager at CLO investor Investec. “And there are not the deep-pocketed, anchor investors in Europe.”
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