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News
First actively-managed direct lending CLO in Europe sets template for others to follow
by Kathryn Gaw & Shant Fabricatorian
Last month, Ares made history by launching Europe’s first actively-managed direct lending CLO. It’s only the second European private credit CLO to hit the market, following Barings’ deal which cracked the market open in November last year.
But while Barings opted for a relatively conservative static issue, Ares chose to create a reinvesting CLO, opening up a new seam of structured credit solutions for European managers and investors.
Aaron Scott, a partner at Dechert in London, worked on both CLOs. “One of the challenges with reinvesting deals is having to open the possibility of adding new assets past the issuance stage,” he said. “Because the assets are coming from a related vehicle, there’s quite a lot of thought put into how those assets will be transferred over from that vehicle, and to ensure that the rating agencies are comfortable with those transfers.”
The Ares issuance has broken the mould in a number of ways. It is the first private credit CLO to be domiciled in Luxembourg rather than Dublin. Unusually for a European offering, it has been priced in sterling, and is comprised of more than 50 middle-market companies based in the UK, primarily operating in defensive industries.
A swathe of European private credit CLOs may follow the Ares deal. Creditflux previously reported that in addition to a second deal from Barings, industry heavyweights Apollo and Blackstone are eyeing European deals of their own.
There’s a lot of thought put into how those assets will be transferred
Aaron Scott
Partner
Dechert
“We have the toolkit required to create static and reinvesting portfolios across sterling and euro exposure,” said Aleem Akhtar, head of European CLO structuring at BNP Paribas, which arranged both deals to price thus far.
“We are working on having multi-currency exposure flexibility as well. So we’ve got various structural solutions now, but we still think the key challenge is more on the asset side, in terms of getting the suitable assets to put a private credit CLO together.”
The availability of high-quality assets is set to become a key consideration as the European private credit CLO market matures. One European credit manager warned that some of the smaller middle market companies could prove particularly exposed in the event of a recession. However, despite the risk of geopolitical conflict and a continental recession, Scott indicated the prospects remained positive overall.
“I haven’t heard any mention of anybody being concerned about geopolitical risks affecting the ability to reinvest going forward,” he added. “I could imagine that if there are heightened geopolitical risks, then it might slow down the private credit market, meaning it might be harder to originate loans going forward. But companies will still need to raise debt.”
In fact, Jeremy Ghose, newly-appointed president of The Chatterjee Group, believes the current geopolitical environment may actually help European capital markets develop.
“Europe’s had a wake-up call,” he said. “There is a growing consensus that the capital markets have to deepen. If we can bring in the CLO [and] institutional investors too, that can only be better for liquidity and overall deal volumes.”
For now, European private credit CLO issuance is likely to remain the domain of the five or six largest players in the market, as only they have a portfolio of private credit loans that are diverse enough to satisfy rating agency requirements. But the successful pricing of the first reinvesting private credit CLO is a sign that the European market is looking to address the deficit in this area compared to the US.
“These deals will start moving towards the reinvestment side,” added Scott. “That provides more flexibility for the managers. Hopefully as investors get more comfortable with the product as well, they’ll be more open to a managed deal.”
