Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2024. All rights reserved. Available by subscription only.
News
Open CLO warehouses in Europe approach record high as confidence grows
by Shant Fabricatorian
European CLO issuance is running at record pace and the number of warehouses set up as precursors to new deals are spiking. “I think it’s the highest number we’ve ever seen,” said Bhavin Patel, CIO of Redding Ridge Asset Management Europe, speaking about CLO warehouses in Europe.
Exact figures are difficult to ascertain, but the numbers are large. Citing company registrations, a report published by Barclays Research on 28 October estimated the number of active European CLO warehouses at nearly 100 — approaching a three-year high.
Managers have been keen to set up warehouses for a number of reasons, including the prospect of a busy year ahead for issuance. “Investors are going to continue calling older transactions, providing the opportunity to reset into new transactions or print new deals,” said Boris Okuliar, co-head of global liquid credit at Ares Management. “The arbitrage is decent, and if you think the liabilities have room to tighten while asset spreads remain stable, then managers will likely maintain activity levels in new-issue CLOs.”
The relatively small cost of maintaining a warehouse to take advantage of market dislocations is another factor, market sources say. And according to CVC’s head of European performing credit, Guillaume Tarneaud, increased competition in the arranger space is having an effect, with HSBC, Societe Generale and RBC among those offering additional warehouse options to managers.
Source: Barclays Research, company registrations
Widespread availability of triple A backstop commitments has also been helpful, Tarneaud added, along with the amount of equity capital that has been raised. “If you’ve got equity capital, then obviously the banks are willing to help you and open warehouses,” he said.
European CLO dealmaking has been prolific since the market came back from the August break, with a total of 35 European deals priced in September and October — well up on the equivalent period in 2022 and 2023, according to Creditflux data. Historically, only 2021, which saw 43 deals priced in the equivalent period, has outstripped this year in terms of overall activity.
Around half the deals over the past couple of months have been resets. Heading into next year, market participants anticipate greater M&A and LBO activity will drive increased loan financing and, in turn, greater asset production, helping bolster the rate of new CLO issuance. This, in turn, means warehouse availability is important for managers looking to capitalise on benign market conditions.
The constraints on asset supply caused by anaemic leveraged loan issuance over the past couple of years have caused the average duration warehouses are kept open to be extended, according to Aaron Scott, a partner at Dechert in London.
“When the CLO market was booming in 2021, warehouses were open for a very short period — they ramped up quickly and then went straight to the CLO stage,” he said. “Now, we’re seeing managers preparing a lot further in advance. I think it’s more difficult for managers to build a portfolio of quality assets, so they want to have warehouses open for longer.”
However, there remain some pockets of concern. Despite the ECB cutting rates and signalling its willingness to trim further, some unexpected credit downgrades affecting firms widely held by CLO managers have induced caution. “From what we see now, the downgrade-to-upgrade ratio has started to tick higher. And from all accounts, some triple C buckets are up at 6%, and even higher,” said Redding Ridge’s Patel.
Nonetheless, market sentiment remains positive, in line with the warehouse trend. “There is definitely increased confidence for 2025,” said CVC’s Tarneaud.
