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Managers predict increased government spending should boost CLO returns in Europe
by Shant Fabricatorian
After two months of record issuance and tightening spreads to start the year, the picture for credit markets shifted markedly in March. But alongside the ramp-up in volatility, investors are growing increasingly positive about Europe.
“Europe appears to be responding to what it perceives as threats, and potentially in ways that are going to change the investing landscape dramatically,” said Tristram Leach, Apollo’s co-head of European credit, in the ‘Credit Exchange with Lisa Lee’ podcast.
Propelled by the now infamous televised Oval Office meeting between US President Trump, Vice-President Vance and Ukrainian leader Volodymyr Zelenskyy, the past few weeks have seen European leaders undertake urgent assessments of ways that dependency on the US can be reduced. Notably, Germany has approved a massive increase in investment for its armed forces, and similar discussions are taking place in other European capitals.
This has led to a more optimistic appraisal of Europe’s economic prospects among some investors, who see increased government spending on ‘made-in-Europe’ goods and services acting as a stimulus.
Adeel Shafiqullah, Sculptor Capital’s head of European CLO management, said the landmark defence and infrastructure bill undertaken by the EU Parliament will be a medium- to long-term driver of growth.
This is driving infrastructure spending, construction and job creation
Adeel Shafiqullah
Head of European CLO management
Sculptor Capital
“That is ultimately going to be a boost for the European economy, driving higher infrastructure spending, construction and building, and job creation,” said Shafiqullah.
But he added that there is uncertainty regarding the new environment on international trade and tariffs.
At the end of March, Goldman Sachs hiked the odds of a recession in the US to 35% in the next 12 months, up from 20% previously. The Wall Street bank cut its UK growth forecast this year to 0.8% from 0.9%.
European CLO markets are seeing a pull-back, in part catching a draft from their more volatile US counterparts. European CLO spreads in the lower mezz widened by as much as 50bps over the second half of March.
“We have observed some investors taking a pause to re-evaluate the macro environment, which has led to some modest spread widening in the CLO debt stack,” said Dan Ko, senior principal and portfolio manager at Eagle Point Credit. But he noted that CLOs have been affected less by the recent volatility than equities.
Other CLO investors that spoke to Creditflux contended that, while the Trump administration has been disruptive, the changes taking place do not represent a seismic shift on the level of the 2008 financial crisis.
Even amid increased global uncertainty, the European market remains an attractive prospect, according to Michael Hombach, portfolio manager at Frankfurt-based asset manager Lupus Alpha.
European corporate credit has continued to show resilience even as US economic prospects look increasingly rocky, he said.
“While stagflationary dynamics are emerging in the US, with politically motivated growth suppression and persistent inflationary pressure, many European issuers have extended their maturity profiles and optimised their capital structures, creating a fundamentally solid credit environment,” he said.
Even in the US, CLOs are eyeing opportunities. “Recall that the non-mark-to-market financing in CLOs allows them to go on the offensive when loan prices fall, buy safer credits at reduced prices and build par,” said Eagle Point’s Ko.
But some of the froth in the leveraged loan market has evaporated. European bankers yanked opportunistic deals, including a EUR 1.97bn term loan B repricing for Dutch beverage bottle manufacturer Refresco, and the EUR 1.11bn amend-and-extend loan for Portuguese crop protection company Rovensa.
