Financial guarantees make comeback in European CLOs

Michelle D’souza

Reporter

European CLO tranche insurance has made a comeback, with sources indicating Assured Guaranty has guaranteed tranches in two Euro CLOs for two separate European investors (a bank and an insurance company) in the past month.

Creditflux understands one transaction involved Assured guaranteeing €125 million of class A notes issued by NIBC’s North Westerly V Leveraged Loan Strategies CLO, arranged by Morgan Stanley. The other involved wrapping up €100 million across a portion of Blackstone’s Tymon Park CLO’s triple A, double A and single A tranches. That CLO was arranged by Goldman Sachs.

Negative basis trades, as they are sometimes referred to, were a big feature of the CLO 1.0 market and Assured was one of the largest guarantors. It worked with investors, issuers, and arrangers globally. It has continued to guarantee 2.0 CLO transactions, but primarily in the US middle market.

“Investors are looking to reduce consumption of regulatory capital”

Steve Kahn, Senior managing director | Assured Guaranty

Such trades may seem counterintuitive given there have been zero defaults for senior triple A tranches historically, but CLO insurance can help alleviate heavy capital charges for investors, given they are essentially holding the investment risk-free.

Steve Kahn, senior managing director in Assured’s structured finance group, says Assured “bolsters participation in the CLO market for new CLO investors that may otherwise be discouraged from investing in CLOs because of punitive capital requirements”.

He says the firm has seen an increase in investors looking for a solution to reduce consumption of regulatory capital, both on existing exposure and new investments going forward.

The news comes at a time when European CLO arrangers have been scrambling to lock in triple A levels weeks in advance of pricing, with investors taking a breather following huge deployment levels in the first half of the year. CLO tranche insurance could therefore have the potential to attract new senior triple A investors to the market.

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Global credit funds & CLO's

September 2021 | Issue 238

Published in London & New York.

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