News in brief

Increasingly popular credit interval funds grow by $10bn in 2023

An interval fund is a type of registered investment company that commits to repurchase a limited portion of its own shares at periodic intervals, typically 5-10% each quarter. In contrast, a traditional mutual fund is required to offer unlimited daily redemptions. As a result, interval funds are a hybrid between traditional mutual funds and private funds. Like mutual funds, they are accessible for retail investors.

It is a structure that has proven popular with credit managers, and credit funds now make up roughly half the interval fund universe. Chris Acito, Gapstow’s CEO, says: “Alternative credit managers have been attracted to interval funds because, while still providing the benefits of a registered fund, the restrictive redemption terms are better suited to holding thinly traded investments — for example, private loans, distressed debt or structured credit — than are the terms of traditional mutual funds.”

A pipeline of managers already exists in the market for 2024, including retail-orientated managers, such as Morgan Stanley, John Hancock and BlackRock.

That said, Acito cautions that interval funds aren’t for everyone. “If you’re a smaller fund, you should stop to consider if you’re ready for the extra workload needed to reach the retail investors,” he says.

New arrangers gather speed in US market

Santander in particular has had a busy start to 2024, with its first two sole arranger credits (for Z Capital’s Credit Partners CLO 2024-1 and Sculptor’s OZLM Funding II), alongside a co-arranger role for Battalion CLO XXV. The bank brought in Adam Schwartz as head of CLOs in June 2021, and has been taking a few co-placement agent credits, but this year looks to be pushing ahead at full speed.

CIBC and Scotiabank broke into the market at the end of 2023, after both Canadian banks brought in new teams earlier in the year. The parallels seem to stop there though, with CIBC, led by Brad Larson, focusing on the broadly-syndicated space, while Scotiabank makes inroads into the private credit CLO market. The team at Scotiabank is led by David Williams and Brad Roberts, who were both well known as MM CLO dealmakers in their previous roles at Natixis.

This year CIBC acted as sole arranger on two US BSL CLOs — Onex’s OCP 2024-31 and Irradiant’s Rad 23 — while Scotiabank did the same on a deal for Fortress and one for Guggenheim.

SMBC Nikko is another name to watch. The bank led on seven CLOs last year and has also been staffing up across fixed income.

January reset wave raises hopes for full year

The dramatic uptick in activity is being driven by a dive in liability spreads, as noted by Barclays Capital in its latest research piece. “The Palmer Square US BSL CLO AAA spread (to SOFR) index has rallied 100bps, from local wides at 240bps in November 2022 to 141bps as of January.”

Assuming that deals are ‘in the money’ for a refi/reset when AAAs are 10bps inside current primary levels, Barclays believes there could be as much as USD 43bn of “low-hanging fruit” US BSL CLOs with clean portfolios and 160+bps of AAA margin.

But Robert Klein, CIO of Structured Credit at Clarion Capital, has seen “recent deals where the spread difference is borderline at best”, so he believes reset volumes this year will be even higher than the forecasts predict.