Global credit funds & CLO's
February 2020
| Issue 220Published in London & New York.
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February 2020
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This is designed to appeal to banks and insurers which have been big investors in senior CLO debt, but are not comfortable with signing Isdas and dealing with margin calls.
This initiative has not progressed as far as issuing managed CSOs, which is another idea CSO specialists are borrowing from CLOs.
Sources say there is still hope that a managed CSO will be issued in the first quarter.
Sources say that the chances of relief being granted to business development companies over the acquired fund fees and expenses (AFFE) rule are slim. Last month, industry body Coalition for Business Development stated optimistically that the “harm caused by the AFFE disclosure can be remedied in the final fund of funds rules”.
BDCs will miss out on exemptive relief from the AFFE rule after the Securities & Exchange Commission explained that it was “unable to distinguish the harm that AFFE disclosure causes to listed BDCs from the harm that AFFE disclosure causes other exchanged-traded funds”.
Washington-based Coalition for Business Development retracted its application for AFFE relief to the SEC on 15 January. It was informed that the decision to not extend relief was based on the SEC’s view of AFFE in a “global” context.
The AFFE rule, adopted in 2006, requires a BDC to disclose its pro rata share of the operating expenses paid by underlying funds it invests in as an additional line item in its prospectus fee table.
The rule was originally implemented to allow investors a “better understanding of the actual costs of investing in a fund that invests in other funds”. But it has had several negative consequences for the industry, with calculations often double-counting BDC expenses and overstating a fund’s expense ratio.
“Mutual funds can be disincentivised from investing in BDCs, despite BDC returns often being more than enough to make up for it,” says Steven Boehm, partner at Eversheds Sutherland. He adds that BDCs may have higher expense ratios than typical mutual funds.
Senior CLO structurers and heads of syndication/origination have found themselves in demand, with Creditflux recording a plethora of moves to the buy side of late.
One New York-based headhunter explains that sell-siders are attractive because “they know the investors, structure the deal, and know what types of deals are in demand”.
Most recently, Francis McCullough, head of new issue CLOs at Deutsche Bank, left the bank to join Sound Point Capital Management, while in December Megan Messina, former co-head of structured credit at Bank of America, joined Symphony Asset Management.
Creditflux reported in May that Wynne Comer left Bank of America to take on a role at AGL Credit Management.
All three join the buyside in various roles. Comer, who was global head of BoA’s primary CLO business, serves as chief operating officer.
McCullough has taken on the role of global head of CLO capital markets and structuring following the departure of Renee Gallizzo. Messina will act as a structured credit specialist and will support the build out of Symphony’s structured credit and CLO platform.
“The asset side has been growing and there is an established template in the US, which can be replicated,” says a London-based lawyer.
The US CRE CLO market has been running since 2012 and last year’s issuance was 40% higher than 2018’s total, according to a report by Kroll Bond Rating Agency. The industry was limited to less than $5 billion of issuance between 2012 and 2016, before hitting its stride in 2017 ($7.5 billion) and 2018 ($14 billion).
The European securitisation market has lagged behind. In CLOs for instance, the US started printing post-crisis deals in early 2010, three years before the first European CLO 2.0s.
The biggest CRE CLO issuers in the US include Arbor, Benefit Street, Blackstone, KKR and LoanCore.
GSO Capital Partners has launched a manager entity named Blackstone/GSO CLO Management LLC in an effort to sell US CLOs into Europe.
The entity is capitalised to $428 million. It will retain equity in GSO’s US CLOs in order to comply with European risk retention regulations as an originator, as well as funding warehouse positions, according to a notice seen by Creditflux.
GSO has in the past used a majority-owned affiliate to invest in US risk retention-compliant CLOs. But with that no longer a requirement, the firm has seemingly shifted its attention towards attracting investors in Europe.
Compliance with European rules is not unusual in the US market for managers with the capital to do so. As GSO says in its notice, attracting European investors can lower the funding costs of a CLO and thereby improve equity performance.
Capital raised for risk retention purposes kept CLO issuance flowing in 2019, even when market conditions were not conducive, as Creditflux reported in the past. Now that these funds have been deployed, a number of CLO managers looking to raise new captive equity funds are struggling to find investors, according to multiple sources.
“They can’t go back to their original LPs because they’ve been pursuing a conservative strategy and generating lower returns,” says one CLO investor, adding that spread compression in CLO portfolios, tail risk names and the number of loans trading above par have put some third-party CLO equity investors off.
Sources say that managers that wish to print CLOs can try and sell equity that was raised for risk retention in the secondary market and reallocate into a new issue.
The CLO market is set to witness its first digital refinancing as TCW Asset Management teams up with Kopentech to road test the latter’s applicable margin reset (AMR) platform, as Creditflux goes to press.
The software shifts the refi process from banks’ primary issuance desks to secondary market traders, and is designed to make the process of refinancing CLO debt faster and cheaper.
Creditflux understands that in the days leading up to the auction, three firms have signed up to execute trades: BNP Paribas, Brownstone and Janney Montgomery Scott.
The AMR process involves broker-dealers submitting bids for each tranche with allocations accepted on an automated basis, including at different clearing points.
A spokesperson for TCW declined to comment, but Kopentech says it has received positive feedback from clients.
“Observers have inquired with us about the applicability of the platform technology to other parts of the CLO lifecycle,” says head of product James Vogl.
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