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January 2023 | Issue 251

News in brief

Mini loan recovery helps primary pipeline re-emerge
Better than expected inflation numbers at the start of November lifted loan prices to an extent that the primary market for leveraged loans opened up, allowing for a number of regular new issue deals to clear the market.
Notably, Nielsen Holdings upsized its dollar and euro term loan Bs, printing at 89 cents on the dollar, the largest discount in the loan market in November, according to Debtwire. The loans weighed in at $2.1 billion and €300 million, compared to $1.5 billion and €250 million expected facility sizes.
Accompanying the return of M&A activity were a number of credits long sitting on bank balance sheets that were underwritten earlier in the year in better market conditions, then sold to investors at discounts as steep as the low 80s.
“If you’re a high-quality borrower with a positive story, you can place loans in today’s market and expect they’d be well received,” says Joe Rotondo, senior portfolio manager at MidOcean Credit Partners.
The Morningstar/LSTA leveraged loan index has an average bid of 92.8 cents as Creditflux goes to press.
Investors’ eyes are now turning to 2023 and concerns about credit fundamentals are deterring investors. However, an unknown factor is how retail investors respond when the fundamental picture becomes clearer, says Rotondo.
“When retail investors feel more comfortable with the economic outlook and realise the return potential of floating rate bank loans, we should see inflows from retail accounts,” he says. “This could be a significant demand driver for bank loans and a catalyst for the new issue loan market. We could see this shift later in 2023.”
Creativity pays off as investors lap up static euro CLOs
Amid a challenging CLO landscape in Europe, managers and arrangers showed creativity in 2022.
For one, arrangers offered triple As at a discount during the year, and took down large portions of the tranche themselves if there was insufficient demand.
Single B tranches, meanwhile, started the year at 900bp, but widened up to 1,500bp by September. With spreads extortionately high, several managers opted to issue delayed drawn tranches, while some CLOs featured turbo tranches. At the IG part of the cap stack, some triple A and double A investors took on Euribor caps.
Seven static CLOs priced in 2022, with deals by Palmer Square, Sound Point, Axa IM, Napier Park and Onex Credit. Palmer Square was the only manager to price a static deal in the previous year.
One banker tells Creditflux: “A sub-section of investors finds static appealing. They like shorter duration and better oversight in the day one portfolio, which will be the main portfolio for the trade. The more significant impact is you get a benefit to the capital structure: there is more going into the triple A, so weighted average cost of financing across the cap stack is materially less because you have to put in less equity.”
Some managers opted for shorter reinvestment periods (versus the market standard three to five years) and non-call periods. 11 deals had reinvestment periods of two years or less in 2022, while 23 deals had non-call periods of around one year (excluding static deals), according to Creditflux data.
Deutsche Bank evolves CLO investment strategy
Deutsche Bank has developed its US CLO investment strategy in recent months, with sources noting the bank has scored co-placement agent roles in two deals.
The bank allocated to senior US CLO tranches in 2022, and towards the end of the year it observed there were few other firms buying senior tranches in the primary market. As such, sources say it was able to push for arranging credits.
Notably, Deutsche Bank was co-placement agent on MidOcean Credit CLO XI (priced 15 October) and AGL CLO 23 (2 November).
This is a tried and tested approach for banks. Standard Chartered and Société Générale have gained CLO arranging roles by virtue of their investment in European CLOs in the past year. Going back a decade or so, Mitsubishi UFJ Financial Group would take CLO co-arranging roles on deals where its affiliate would take down sizeable cuts of triple A debt. The bank would go on to develop a standalone CLO arranging business.
The MidOcean and AGL CLOs have different tenors, suggesting Deutsche Bank’s investment mandate is flexible. The MidOcean deal has a three-year reinvestment period, while AGL’s CLO has a full five-year reinvestment window. The seniors in these deals attach at 38.62% and 38.5%, respectively.
Carlyle Group targets $6.5 billion for credit opps fund
Carlyle Group is targeting $6.5 billion for its third opportunistic credit fund, according to a pitchbook seen by Creditflux.
On 1 December, investment consultant Hamilton Lane presented Carlyle Credit Opportunities Fund III to US pension Teachers’ Retirement System of Louisiana, which allocated $125 million to the vehicle, a spokesperson for the pension confirmed.
The New York-headquartered firm will invest primarily in North America and Europe across a variety of sectors, including aerospace, defence and government services, consumer, media and retail, financial services, healthcare, industrial and transportation, technology and business services.
The fund will invest in companies with enterprise values of $500 million to $1 billion, through around 40 investments of $150-$600 million, according to the presentation.
It will have a 15% cap for single investment exposure and the hold period for investments will be between six months and four years.
Alexander Popov, managing director and head of illiquid credit, leads Carlyle’s credit opportunities strategy with support from Taj Sidhu, head of European illiquid credit, alongside Andreas Boye and John Pavelski, co-heads of North American credit opportunities.
Carlyle’s inaugural credit opportunities fund raised around $2.37 billion in 2017, while its second fund raised $4.57 billion in 2020.
Those funds have returned 13.1% and 9.6% net IRR, as of 30 June, according to the presentation.
US CLO investors express cautious optimism for 2023
After a turbulent year in 2022, US CLO investors are sounding a cautiously bullish tone heading into 2023. Sources say the risk reward profile is increasingly attractive, despite the likelihood of downgrades and defaults markedly increasing in the early months of 2023.
CLO triple As offer a 7% total return, while top-performing profiles for double B CLOs offer a 13-15% yield to maturity. Sources say that double B CLOs could have an upside of 20% or higher in the event the market recovers to its pre-2022 levels.
One CLO equity investor tells Creditflux that 2023 could be a strong year for equity returns, and highlights how the asset class has historically rebounded from poor years.
New research from Barclays forecasting CLO market trends for 2023 predicts CLOs will recover in the latter half of the year, with triple As tightening to around 190 basis points.
“The second half of 2023 will likely witness a recovery as clarity emerges with global growth set to change course, inflation likely to be under control, and central banks weighing the option to cut benchmark rates,” write US analysts Keyur Vyas and Jeff Darfus, and European analysts Soren Willemann and Neeraj Kumar. “We believe CLOs, in line with other credit products, will rebound.”
The Barclays analysis notes that warf and triple C buckets are near their pre-pandemic lows and that junior over-collateralisation test cushions are at a record high, which should allow CLOs to weather a wave of downgrades and defaults.
However, it cautions that low single B assets are taking up a record percentage of CLO portfolios and credits trading below 80 have increased.
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Global credit funds & CLO's
January 2023 | Issue 251
Published in London & New York.
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