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News
News in brief
Rapid growth shows middle market CLO no longer BSL’s little brother
Middle market CLOs, the once niche sector that securitises private credit loans, is seeing a growth spurt. What was a junior partner to the much larger BSL world is now a sizeable entity of its own. The trend is underpinned by the surge in private credit loans, which has grown to a USD 1.7tn market.
So far this year, the CLOs that repackage private credit comprised nearly 20% of total new issuance, according to JP Morgan research. That’s a doubling from 10% in 2022.
“Since 2016, the middle market CLO market has been growing at a considerably higher rate than that of the BSL CLO market, with a compound annual growth rate of approximately 25% versus approximately 12%, respectively, over that time,” said Dinko Angelov, managing director at Audax Private Debt.
Middle market CLO share of overall CLO deal activity was even bigger last year at 23%. But in 2022, BSL CLOs languished for most of the year. Back then Wall Street banks pulled back their leveraged lending activity as they nursed painful losses from hung deals and dealt with new capital requirements, and CLO investors were demanding higher spreads.
The BSL CLO market has roared back with a vengeance, and new deals and resets are booming. “In the near term, we expect middle market CLO issuance will continue to grow at a pace consistent with the recent trends,” said Angelov.
According JP Morgan data, there have been 53 middle market US CLOs year-to-date with pricings totalling USD 26.1bn. Of those deals, 37, priced at USD 19.6bn, were new issues.
Leveraged loan issuance tops USD 1tn in record-setting first half
US leveraged loan issuance has jumped 91.2% year-on-year in the first six months of 2024, reaching USD 1tn for the first time on record. Institutional issuance has led the charge with a 391% surge versus the same period last year, to represent USD 713bn of the total amount — a record in its own right.
While even new money institutional activity doubled versus 1H23 values, the driving factor was the unprecedented deluge of refinancing activity, which jumped 481% versus 1H23 to USD 643bn, reflecting institutional investors’ ability to recommit funds to higher-risk assets amid a favourable economic backdrop. Unsurprisingly, the past two quarters show the lowest proportion of new money activity on record.
The risk-on perspective can be seen in the near doubling of second-lien issuance, to USD 1.74bn, while dividend recaps have surged by 212%, indicating that companies are back to leveraging balance sheets to return capital to shareholders while the iron is hot. This can also be seen in the gross and net leverage of companies rising to 4.7x and 4.3x, respectively, in 1H24.
The spike in volume highlights the proactive approach taken by issuers to refinance their existing debt given the permissive market conditions.
The lion’s share came from sponsored firms, which raised USD 494bn, as private equity firms recognised the opportunity in the capital market. The wave of refinancing has pushed out the maturity wall to a healthy degree, with a clear wall of 2028 maturities having formed that are yet to be tackled, to the tune of USD 627bn.
Credit Outlook survey signals rising defaults among small borrowers
Respondents to the latest Credit Outlook survey from the International Association of Credit Portfolio Managers are forecasting rising defaults over coming months, with some saying they’re already seeing an increase, especially among small borrowers.
The survey is conducted among members of the IACPM, an association of 144 financial institutions around the world. Members include portfolio managers at many of the world’s largest commercial banks, investment banks and insurance companies, as well as several asset managers.
As expected from credit professionals, they tend to focus on risks, but even so their relative gloom is increasing. The IACPM Aggregate Credit Default Index is -44.1 this quarter, compared to -36.5 last quarter, which means more respondents expect higher defaults now compared to the last survey conducted three months ago.
“Interest rates have stayed higher for longer, and borrowers are beginning to feel the pinch, alongside the difficulties posed by continuing inflation,” said Som-lok Leung, executive director of the IACPM.
Small borrowers may be the first to run into trouble, but even large ones are beginning to show some weakness, according to participants. Among the sectors affected are transportation, automotive, healthcare and commercial real estate.
Respondents noted, however, that for all the challenges faced by companies over the past three or four years, including the pandemic, rising inflation and higher interest rates, borrowers have held up remarkably well.
Top stories on creditflux.com: from Paul Hastings’ hiring spree to Comvest’s debut deal
4 June 2024
Barclays loses veteran CLO bankers as market heats up
Barclays European team lost two key bankers just as new deal issuance booms. Christoffer Christiansen, a director in the bank’s CLO structuring team, and Michael Clarke, most recently European head of credit finance origination, both decamped.
Barclays: Christiansen intends to return to Denmark, while Clarke’s plans are unknown, although he is understood to have stepped back from day-to-day involvement in CLOs three years ago
4 June
Paul Hastings taps nine attorneys from King & Spalding team
Paul Hastings hired nine seasoned attorneys from King & Spalding, including Jennifer Daly, the former head of the private credit and special situations group.
6 June
New and old Japanese buyers look to booming CLO market
Japanese investors — including life insurers Dai-Ichi Life Insurance, Meiji Yasuda and Aioi Nissay Dowa — are ramping up investments in CLOs.
7 June
Barcelona mood restrained despite red-hot pace of CLO deals
For a market on track for a historically large new issuance year, CLO participants at the AFME & Invisso Global ABS conference in Barcelona were less than euphoric.
10 June
Unusual Golub CLO sees huge upsize
Golub Capital reset an unusual static middle market deal — a US CLO with a rare euro-denominated tranche. Weighing in at just over USD 1.3bn, it was the second-largest transaction so far this year.
11 June
Janus’ AAA CLO ETF tops 10 billion in AUM
Janus Henderson AAA CLO ETF (JAAA) passed USD 10bn in AUM, as interest in CLOs continues to rise among retail investors.
13 June
Comvest aims to become the first debut US manager of the year
Comvest Capital Advisory Services was in the market with its debut CLO: Comvest Credit 2024-1 CLO, a middle-market deal. The deal subsequently priced in early July.
14 June
Golub prints tightest new middle-market CLO of 2024
Golub Capital and RBC Capital Markets priced a new middle market CLO with the tightest senior and mezz spreads so far this year, with the senior triple As priced at SOFR plus 162bps.
19 June
First private credit LTAF is approved
The UK’s FCA greenlighted a joint venture from Arcmont and Carne — it will be the first long-term asset fund offered by a private debt specialist.
24 June
Blue Owl prints another MM-style BSL CLO
Although the most recent Blue Owl deal was a US BSL CLO, structurally it looked and felt more like a middle market deal.
25 June
Norinchukin Bank signals potential increase in CLO allocation
Japan’s Norinchukin Bank signalled it could increase its allocations toward CLOs in a further boost for triple A CLO investor demand, according to a research report by Deutsche Bank.
27 June
Carlyle direct lending origination head jumps to Apollo
Nino Cordoves joined Apollo as a managing director.
Past returns
Deutsche dispersal
Ten years ago we wrote a profile on CLO arranger Deutsche Bank. A decade later it is still active, but that original team has spread out across the market.
Our biographies included the CLO leadership team at the time, Francis McCullough and Chris D’Auria. McCullough is now global head of CLO capital markets & structuring at Sound Point, and D’Auria runs business development at LCM.
The two CLO traders we featured are also both in the business, and both still trading. Rich Rizzo is now at BMO, while Shawn Cooper is a PM at Orchard Global.
Points up front
Centerbridge slam dunks Churchill
Fixed income professionals who are looking to play a more dynamic company sport than golf may want to consider private credit. A recent LinkedIn post brought intramural basketball to our attention, and the two recent championship finalists, Churchill and Centerbridge.
Apparently the Churchill Gryphons fought a valiant fight but just fell short with a close score of 44-41. Congratulations to Centerbridge on its win.
Churchill Gryphons: ran the Centerbridge team close in the private credit basketball final
Turning CLOs into alphabet soup
As CLO ETFs continue to grow, the market is facing a new challenge — explaining exactly what a CLO triple A ETF is to the army of financial advisors who need to pitch the product.
VanEck is one ETF manger that has produced a handy cheat sheet. It starts off well enough: “CLOs have delivered the most attractive risk-adjusted returns in fixed income over the past decade. However, understanding their key components — such as credit quality, high yield, duration and simplified access through ETFs — can be challenging.”
We applaud the effort, even if we remain sceptical about how many investment advisors — and their retired clients — will really understand it. And it’s a little sad that one of the sections is about why CLOs are different from CDOs…
