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News
News in brief
Project finance CLOs target loans to rapidly growing data centre sector
The small but vibrant infrastructure CLO community could see a boost in issuance thanks to a new source of assets — data centre financing.
The growth of cloud services, AI and crypto currencies is triggering a surge in demand for the infrastructure that powers them. According to a report from Moody’s, global data centre capacity will double in the next five years. In the report, lead author John Medina says: “We estimate that global investment in new data centre capacity will total about USD 2.2tn, or an average of USD 443bn annually, from 2024 through 2028. Financing this requires access to multiple debt capital markets.”
With conventional real estate financing all but tapped out, data centres are now turning to project financing. According to MUFG’s Mahesh Assomull, data centre project finance loans are well suited as CLO assets. “Infrastructure/PF CLOs have historically had mostly power generation assets, but that’s changing. Data centre financing deals are first lien, senior secured loans with a three-to-five year duration. They’re structurally very favourable to CLOs.”
The PF CLO market has seen a slow but steady flow of deals over the years in both the US and Asia. In the US, PF CLOs are managed by a handful of repeat issuers, including DWS and Starwood. They are similar structurally to regular BSL CLOs, but with a smaller pool of higher rated assets, and tend to price between BSL and MM CLOs.
A market source said: “We’ve already seen two US PF CLOs this year, and we expect two to three more before the end of the year.”
US insurance regulator steps back from radical change to CLO charges
Insurance companies are one of the most important investors in CLOs, so when the NAIC last year proposed changes to risk-based capital (RBC) charges the market was spooked. Recently, however, the US insurers’ body has moderated its position.
The NAIC isn’t technically a regulator, as US insurance regulations are managed by individual states, but the body’s proposals are invariably adopted.
Kathleen Birrane, a partner at DLA Piper, and a former Maryland insurance commissioner, said: “I think that insurance regulators deeply understand the need to chase yield. That means there is no hostility towards creative mechanisms of enhancing yield, but all of that has to take place within an environment of assuring risk assessments are accurate.”
The first NAIC project looked at what should be treated as a bond, and what should be treated as equity. That comes into force in January 2025, but will mainly impact privately rated structures, such as rated feeder funds. A second project, which will develop a holistic framework to combat ratings arbitrage, is underway. It now seems far less intrusive than originally feared.
The final taskforce is looking at what RBC charges should be applied to CLO tranches. The most controversial part examines CLO equity specifically, which currently carries a 45% charge. This report has been delayed to the end of 2025.
“I think the industry is taking some comfort from the fact that there now seems to be a deliberative, thoughtful process,” said Grant Buerstetta, a partner in the CLO team at DLA Piper.
Surge in CLO amortisations creates negative net issuance
Data suggests July will be the largest month for US CLO amortisations and liquidations in years. A report from Citi, based on data as of 26 July, predicts amortisations in July will reach USD 20bn — bringing total amortisations year-to-date to a whopping USD 65bn. Adding to the issue is the fact that US CLOs have also seen USD 26bn in liquidations so far in 2024, according to Citi.
The repercussions are substantial: US CLO net issuance year-to-date has turned slightly negative (to minus USD 400m) despite a total of USD 90bn in gross issuance.
The causes, market insiders say, include numerous deals that are past their repayment periods, faster loan repayment speeds, and a lack of investable assets. This leaves managers with few options to replace disappearing assets.
The surge in amortisations and liquidations was inevitable, said Laila Kollmorgen, who manages CLO tranche investing for PineBridge Investments.
“It’s just the natural progression of what happens when, at the end of 2023, you have approximately 40% of the US market out of its reinvestment period and you get to the moment where the loan market recovers and things begin to trade off above par,” she said.
Triple As are the lion’s share of the issue, according to the June 2024 US CLO Scorecard report by Citi researchers Lijing Wang and Maggie Wang.
Gross issuance of CLO triple As was USD 58bn year-to-date as of 26 July. After factoring in USD 59bn in amortisations and USD 6bn in liquidations, net supply has shrunk by USD 17.4bn.
Top stories on creditflux.com: from fund raising to firm launches
11 July 2024
CLO veteran Madhok departs Bain for KKR in San Francisco
Lakshya Madhok has stepped down from his role as managing director and CLO portfolio manager at Bain Capital. Madhok spent 11 years with the firm. He decamped to join rival CLO manager KKR and will move to San Francisco.
Madhok: at Bain, he helped manage a portfolio of investments in CLOs and corporate-backed structured credit, as well as structuring Bain’s own CLOs.
2 July
Atlas SP poised to join CLO arranger ranks
Atlas SP was readying to enter the CLO arranging business. The New York-based origination platform, which was formed out of the former Credit Suisse securitised products business, was working on a forthcoming reset that has since priced.
9 July
CIBC hires new head of structured credit sales
Veteran CLO banker Patrick McKee joined CIBC Capital Markets. He will head up structured credit sales.
15 July
Ex-Sculptor veterans launch asset-backed firm
Sculptor alumni led by Akhil Mago kick-started a new asset manager named Indago. The firm will invest in asset-backed finance and CLOs.
17 July
Manager tiering almost vanishes in US BSL market
Tightening spreads in the US new issue market led to manager tiering collapsing, with a new CLO from Wellington appearing to be irrefutable evidence of the trend.
19 July
Nuveen hires CLO veteran from Apollo
Nuveen snagged Obinna Eke from Apollo Global Management to lead the manager’s CLO capital markets and structuring efforts.
19 July
CLO manager Boswell leaves Ninety One for HPS
Jeff Boswell has joined HPS Investment Partners as a managing director and co-portfolio manager of HPS’ European CLOs. He was previously at investment manager Ninety One.
22 July
Onex resets CLO with unusual two-tier equity structure
Onex has reset OCP CLO 2017-14, a US BSL CLO noteworthy for its use of two tiers of equity.
22 July
Private credit default rate rises sharply
Proskauer’s “Q2 Private Credit Default Index” for the US showed a 2.71% default rate during 2024’s second quarter, compared with 1.84% in the first quarter.
23 July
Trinity Capital partners with Eagle Point
Venture debt specialist Trinity Capital and CLO equity investment firm Eagle Point Credit have launched a credit fund intended to become a private BDC.
23 July
Brigade prices EUR 377.5m reset on rapidly-amortising CLO
Brigade Capital Management priced a 2018-vintage CLO reset that widened Armada Euro II’s overall cost of funding. Morgan Stanley arranged the transaction.
30 July
Hayfin agrees to Arctos-backed buyout
The management team at Hayfin Capital Management announced a management buyout.
31 July
Oak Hill seeks to raise huge CLO equity fund
Credit manager Oak Hill Advisors is looking to raise a captive CLO equity fund capped at USD 800m.
Past returns
PIMCO back and growing
Five years ago we broke the news that PIMCO was looking to return as a CLO manager after a 12-year absence.
It took the West Coast giant more than a year, but return it did, pricing its first CLO of the new wave in late 2020. Since then, PIMCO has issued five more deals and now manages USD 2.43bn of CLO AUM, according to our 1H24 manager rankings.
Loren Sageser, the PIMCO executive that featured in our story, has since moved on. In April, we reported his arrival at Schroders Capital as a senior product strategist on the private debt and credit alternatives team.
Points up front
Avoiding catching the CLO bug
There’s a long history in this section of Creditflux of forced sporting metaphors. So with the Paris Olympics centre stage, we thought it might be fun to argue about which CLO manager is Simone Biles, and which is Rebeca Andrade — but decided that’s probably best saved for a conference after-party.
Instead, the metaphor that springs to our mind is of the triathlon stage in the Seine. A cohort of brave competitors swim through murky waters that harbour all sorts of nasty bugs — just like CLOs swimming through the current sea of corporate credit full of defaults, LMEs, PIKs etc.
Let’s hope that none of our brave swimmers pick up an e-coli infection.
The Olympic triathlon: an event almost as tough as pricing a CLO when the arb is against you
Getty Images
The bells ring out for public listings
With the new vogue for public listings of credit funds comes a new wave of bell-ringing at the NYSE. A few days before this issue went to press, it was the turn of Obra’s Blair Wallace and Peter Polanskyj to celebrate the launch of a pair of structured credit ETFs. And before them in July, Kayne Anderson came to celebrate a new BDC, and Pearl Diver flew in from London to ring in its listed CLO equity vehicle, Pearl Diver Credit Company.
Congratulations to all three companies.
