Global credit funds & CLO's
June 2020 | Issue 224
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June 2020 | Issue 224
Analysis CLOs
Europe’s newcomers find ways to stand out
Charlie_Dinning
Charlie Dinning
Data journalist
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
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Bonds can be cheaper than loans
Bonds are popular in CLOs for a few reasons. Market sources say that one factor is that bonds can trade at a significant discount to leveraged loans, despite having the same risk profile. The embedded call option of bonds is also important. Harker-Smith says that this allows CLO managers to build par through capital appreciation. “In a spread tightening environment, you would expect bonds to trade well above par because of the optionality, giving a great opportunity to buy and then rotate out of bonds and build par,” he says. This was a theme throughout 2019 and early 2020.

The most popular bonds for CLO managers were issued by United Group under the name Adria Midco. €463 million of the issuer’s bonds could be found in European CLOs in February, with Investcorp holding the largest share: €61.1 million. KKR bought the telecommunications provider in March 2014 but sold a majority stake to BC Partners in March 2019.

KKR Credit had the sixth highest exposure to these bonds among European CLO managers, with €23.5 million in its portfolio.
Last year’s new European CLO managers needed to provide something different for investors. In general, they’ve succeeded, with Capital Four having one of the smallest overlap figures in our data
The average portfolio overlap for each European CLO manager stood at 51.7% as of February trustee reports. Last year Creditflux reported that for European CLOs that went effective in 2018, overlap was 48.7%. Oliver Harker-Smith, CLO portfolio manager at Barings in London, points out that while the European CLO market has increased, “the European loan market has also increased significantly over the last three or four years, with €320 billion outstanding today”. He says that taking the high yield bond universe into account, there is plenty of room for European CLO managers to differentiate themselves. BlueMountain Fuji has the highest portfolio overlap with the rest of the European CLO market at 60.07%. KKR Credit Advisors is a close second as it recorded an average overlap of 60.05%. The two managers are well matched: they have an overlap of 72.3% across their portfolios. Accunia (47.1%) had the lowest average overlap with the European CLO market of any manager with more than one CLO in the data.
Ostrum and Capital Four are different
Two newcomers averaged a portfolio overlap of less 40% with the rest of the market. Capital Four Management overlapped on 34.1% of its portfolio. Ostrum Asset Management had an average overlap of 36.9%. Copenhagen-based Capital Four also recorded the lowest overlap with another European CLO manager. The debutant, which priced its first CLO in October, shares just over a quarter of its portfolio with BlackRock, with Altice accounting for the largest single common exposure. BlackRock owned €71.5 million of the company’s debt through its European CLOs in February, while Capital Four had €4.0 million invested in the telecommunications company’s loans.
  • Data includes European deals within reinvestment period.
  • Bond flex deals are excluded.
  • For each pair of managers, the portfolio overlap figure is calculated from a comparison of the weighted average of common issuers across CLOs in the data. Overlap is based on issuer name.
  • Figures are based on February 2020 trustee reports.
  • All data has been sourced from CLO-i and Moody’s Analytics.
Methodology
The European CLO market is as crowded as it ever has been. 51 managers have at least one deal that is reinvesting, according to February trustee reports, with eight firms issuing debut European CLOs in 2019.
“The market has increased significantly”
Oliver Harker-Smith, CLO portfolio manager | Barings
Manager exposures (%) to largest leveraged loans*
* Managers are top 10 based on Q1 2020 AUM. Loans are largest in our data (see methodology).
GSO and KKR have largest overlap
European CLO managers: portfolio overlap of deals that are within reinvestment period
GSO Capital Partners and KKR had the largest overlap between two European CLO managers in February. The global firms have 77.7% of their portfolios in common and it is Liberty Global that accounts for the highest proportion of this. GSO held €173.9 million, while KKR was exposed to €49.5 million of the loan.

It is no surprise that Liberty Global was the most shared issuer between GSO and KKR, as it is the most widely held issuer in European CLOs. €2 billion of the company’s debt was owned by CLO managers in February. Ostrum is the only manager not invested in Liberty Global’s loans.

The largest loans are not necessarily held by the largest CLO managers. EG Group, for example, was avoided by Carlyle, Investcorp, and ICG in their European CLOs, despite being the fifth most held issuer across the market, with €1.2 billion of the company’s debt in European CLO portfolios. ICG has also avoided Springer Group, the ninth most held issuer in February trustee reports.

Bonds made up 8.8% of European CLO portfolios on average. At PGIM, the largest holder of bonds, the bond share is 18.37%.
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