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News in brief

July 2022 | Issue 247
Regulators give securitisation another tranche
A gloomy economic outlook and drought in primary markets cast a deflated mood over last month’s Global ABS 2022 conference in Barcelona. But regulators and central banks’ encouraging attitude towards securitisation was in sharp contrast, say attendees, with some calling the shift in tone a “sea-change”.
European regulators have tended to regard securitised assets with suspicion since the 2008/9 global financial crisis — a stance contributing to the region greatly lagging US issuance. And there has been more talk of tightening rather than relaxing shackles, with bank capital charges and risk retention mentioned. However, these do not appear yet to be on the table, and messaging has pivoted to securitisation as an answer to various capital markets conundrums.
“The impression I have got from the regulators was pretty upbeat,” says Poh-Heng Tan, managing director at the CLO Research Group. “Securitisation can play a vital role in mobilising institutional capital for green and critical infrastructure debt in both developed and emerging markets. I hope the regulators will create frameworks that will incentivise market participants to help with the transition towards a zero-carbon future.”
Elizabeth McCaul, supervisory board member at the ECB, used her keynote speech to laud securitisation’s ability to enhance banks’ capacity to channel lending to the real economy. “It can provide banks with additional funding,” she said. “It can allow risk to be transferred to investors, and provide for homogenisation of a wide variety of credit risks, which makes that credit risk less of an issue.”
European CLO managers wait for stability as loans slide
European loan prices have dipped into the high 80s, as Creditflux goes to press, which should create an attractive entry point for loan buyers. But, in reality, the bid for these assets has not been strong, particularly from CLOs amid fears loans could slump further still.
Madelaine Jones, European high yield and loan portfolio manager at Oaktree Capital Management, says the standstill in the CLO primary market is causing CLO managers to pause warehouse purchases.
“It’s possible that some warehouses are unable to add collateral as they hit draw stop triggers, but I think more significantly the manager and arranger may want to see stability in the loan market and signs of life in CLO primary before loading up,” she says.
“So, rather than warehouses not being able to buy, it’s an elective decision. Particularly as secondary loans are available in volume and at discounts, there is no need for a warehouse to add loans ahead of pricing.”
The last European CLO to price was Permira Credit’s Providus VII on 7 June — three weeks ago.
Jones: warehouses are choosing not to buy at the moment
CLO managers try loan restructuring provision
European CLO managers have taken advantage of new loss mitigation language in deals for the first time, after Schur Flexibles announced a restructuring last month.
However, sources say that while most CLOs have these provisions, a few managers held the loan in warehouses. In these situations, some managers cut losses early and sold the loan.
CLO managers began including workout language in documentation around September 2020. These clauses permit a CLO to invest outside its eligibility criteria after a default or restructuring of an existing obligation.
CLO managers hold around €138.4 million of Schur’s debt, with Redding Ridge (€45 million), Carlyle (€14.6 million) and Axa IM (€13 million) holding the largest exposure, according to CLO-i.
Moody’s downgraded Schur Flexibles to Caa2 on 23 June. As reported by Creditflux’s sister publication Debtwire, Schur entered an Apollo-led proposal, which includes €150 million super senior debt, with reinstated opco debt reduced to 25% of the outstanding amount and no holdco debt.
ETFs open up to CLOs as PineBridge/VanEck team up
Although CLO triple A investors are scarce at present, CLO exchange traded-funds are becoming a bigger part of the investment community after PineBridge Investments partnered with VanEck to launch VanEck CLO ETF (CLOI) last month.
The fund buys investment grade CLO tranches. As of 24 June, 29.28% was allocated to CLO triple As, 46.92% to double As and 14.04% to triple Bs.
“Our specialty as a firm has always been providing access to areas of the market that have historically been hard to reach for a broad range of investors,” says William Sokol, product manager at VanEck. “We thought CLOs were a space that large numbers of individual investors or advisors don’t have access to, and this product really opens up the door.”
Laila Kollmorgen, PineBridge managing director overseeing the firm’s CLO tranche investments, says CLOs are an institutional product, which blocks some investors. “This is targeting investors who would love to invest in CLOs but are not looking to invest a minimum of $50 million in a separately managed account,” she says.
CLO ETFs are a growing portion of the CLO market. Janus Henderson was the first to enter the space with a fund launched in 2020 targeting triple A-rated CLOs, which currently holds $1.42 billion of assets. It was followed by a fund targeting triple B and lower-rated tranches a year later.
“We’ll be looking at investing principally in the secondary market, but will look at the primary market if we believe it offers better value,” says Kollmorgen.
VanEck CLO ETF is listed on the New York Stock Exchange and has a 0.4% expense ratio.
Tech platform aims to cut time spent reading CLO docs
Officials at Claira, the new platform that provides natural language understanding technology backed by Citi, say the CLO market is a core industry for them as they seek to help market participants quickly assess loan and CLO documents.
There have been several firms launched recently that provide CLO documentation analytics, including Semeris and DealScribe (launched by former Creditflux editor Mike Peterson).
Chief technology officer Joe Squeri says Claira is another sign that the CLO market is embracing efficiency solutions following the launch of CLO trading platforms last month from KopenTech and Octaura.
“The digitising of the CLO market is coming and we want to be a big part of that,” he says. “It can take 30 minutes of an analyst’s time looking through CLO documents for the information they need, but we aim to shrink that to two minutes.”
Chief executive officer Eric Chang says that as Claira sheds more light on the underlying loan market, liquidity might not be concentrated on the top 100 flow names. “CLO managers might broaden their portfolio beyond the most liquid names,” he says.
An advantage of Claira over other products is that customers do not need to spend months labelling documents to line up with vendor models, adds Squeri. The product can also capture new terms and backfill legacy transactions to illustrate how these could be impacted.
ECB wizards seek ‘anti-fragmentation’ spell to calm spreads
Eurozone financial market performance this month will heavily focus on the European Central Bank’s unveiling of an ‘anti-fragmentation tool’ as it races to avert a blow-out of peripheral spreads and the build-up of longer-term financing problems.
Talk of the solution has increased since the ECB’s hawkish turn on policy at its 9 June meeting caused Italy’s 10-year sovereign debt to surge over 4.1%, up almost 1% from the start of the month. The central bank then announced the anti-fragmentation plan at an emergency meeting on 15 June, after which Italy’s yield rallied back to 3.5% in two days.
These reactions suggest anti-fragmentation is a prerequisite for the ECB to tighten rates and asset purchases. Without it, tightening could test the economic and political stability of countries such as Italy in July and September.
One fear is that Italian lenders face a rising tide of new non-performing loans, a huge setback for the normalisation agenda of the past decade.
One Italian private equity specialist at Global ABS 2022 last month said: “Italy faces a twofold problem. First, it entered the 2020 pandemic on a poor footing as its entrepreneurs and SMEs programme was based on 2019 data. And credit scoring for homebuyers has also been inaccurate, which could lead to arrears and NPLs as conditions worsen.”
While broadly optimistic about a well-designed anti-fragmentation tool, strategists and economists warn it introduces additional risks. One question is whether the ECB assesses only sovereign bonds, or also bank lending and financial conditions — which are harder to measure in real time.
Loan traders eagerly await electronic trading solution
The announcement of Octaura’s electronic loan and CLO trading platform last month has been met with positivity by market participants, who laud the unified approach taken by large investment banks in supporting the initiative.
The platform is ready, but Octaura founder Brian Bejile told Creditflux last month that the firm was waiting to onboard enough clients to reach critical mass.
“There have been successful single-dealer platforms in the past, but this is the first venue supported by multiple banks,” says one loan trader at a large US CLO manager.
Octaura is backed by Citi, BofA, Credit Suisse, Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo.
The optimism surrounding its launch stems from the fact that trading standards are starting from a low base, with the time taken to assess data and make contact with sell-side traders not conducive to liquidity. CLO managers stand to gain the most, given their penchant for rotating portfolios vigorously.
Greg Wipf, loan trader at Bain Capital Credit says there is plenty of scope to improve liquidity in the loan market given loans are still traded over-the-counter.
“Anything that brings efficiency and pricing clarity is helpful,” he says.
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Global credit funds & CLO's
July 2022 | Issue 247
Published in London & New York.
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