(Bloomberg) – European banks are grabbing much of their own secured loan obligations, keeping the CLO market afloat in the absence of the U.S. and Japanese banks that traditionally make up the bulk of the base. buyers.
French bank Societe Generale SA held its first CLOs since the global financial crisis in November and then, following the example of Deutsche Bank AG earlier in the year, it also played a key role in securing the deals by buying part of the AAA – or the safest bonds. By doing so, these banks hope to keep the wheels turning until more takers materialize.
European CLO markets came to an abrupt halt earlier this year after global sentiment deteriorated following the US Federal Reserve’s first 75 basis point hike. Concerns about downgrades and defaults are growing as the loans that serve as collateral for CLO bonds are issued by heavily indebted companies that are particularly exposed to higher costs and interest rate hikes. There have also been other shocks, such as the sell-off by UK pension funds during the recent gilt crisis.
The big global banks have always been the largest clients of CLOs, but those that did the deals were not major investors in their own vehicles. However, with US banks’ appetite for CLOs either satisfied by record 2021 issuance, dampened by regulatory pressure or tempted by better relative value elsewhere, the traditional buyer base for these products has shrunk. This led the Europeans to intervene.
“The ramp-up of European banks, particularly in stripping substantial amounts of triple-A, has been very significant this year during the difficult macro and geopolitical turmoil,” said James Smallwood, senior partner at Allen & Overy LLP. “The arrangers will step in to complete the triple-A if necessary. On a case-by-case basis, this may change from a minority to a substantial majority.
As produced by banks largely for other banks, under normal circumstances the treasury department of an arranger institution may also choose to take a small position in a CLO. The demand for triple-A would also have been robust enough that this type of top-up, if any, is more likely to relate to lower-rated bonds. This year, the organizing banks have effectively become anchor investors in many of their own transactions as demand has weakened.
Finding investors willing to buy AAA-rated securities issued by CLOs has become more difficult this year, according to Octagon Credit Investors’ Lauren Law.
For the organizing banks, the fact that AAA yields are near record highs makes buying these portions of CLOs acceptable. Yields of 4% to 5% make them “compelling,” according to Vasundhara Goel, head of European ABS and CLO strategy at Morgan Stanley.
“There’s a connection between price and why an arranger would do that,” she said.
SocGen, which is already active in CLOs in the United States, entered the European market through a partnership with Barclays PLC after CVC Credit Partners lost key support on a deal. The ability of the French bank to fulfill this dual role of arranger and investor has enabled it to access a market that is generally difficult to penetrate. BNP Paribas SA is another European institution that has played this dual role of arranger bank and key investor in a number of transactions this year.
“The vast majority of issuers in the ABS and CLO market know they can struggle with triple A, so they appreciate when the bank can support that,” said Laurent Mitaty, head of asset-backed products. of SocGen for Europe and APAC.
Representatives of Deutsche Bank and BNP Paribas declined to comment.
Read more: CVC Credit CLO Loses Key Investor Norinchukin Bank Mid-Deal
However, in the same way that some US banks filled their coffers with CLO bonds last year, the new generation of investor-arrangers could also find themselves at the limit of their capacities. It’s in the nature of the market that different groups of investors appear at different times, according to Allen & Overy’s Smallwood. The danger would be that the disruption persists and a new batch of funders does not emerge. Some see the pace of emissions slowing next year.
“It’s been a big trend this year, but there have to be limits,” Morgan Stanley’s Goel said. “Every investor has their limits on how much they can buy, regardless of the direction of the purchase. At some point, they might run into capacity constraints.
Elsewhere in credit markets:
The European primary market should be calmer this week, with the seasonal slowdown taking hold even in still favorable credit conditions.
- French telecommunications company Iliad was the only borrower to enter the European market at 11 a.m. London on Monday, with a note of 500 million euros to refinance existing debt and for general corporate purposes.
- Forty percent of respondents to the most recent Bloomberg News survey do not expect sales to exceed 15 billion euros this week, compared to just 10% with such a low target last week; none expect sales to exceed 25 billion euros
- Prices of a junior bond sold by UBS Group AG jumped after the lender decided to take its first opportunity to repay the debt amid fears some of Europe’s riskiest bank bonds could remain outstanding
- Credit Suisse Group AG junior bonds with redemption dates next year listed higher after UBS move
Yield premiums on investment-grade Asian dollar bonds tightened further on Monday, extending a recent rally, as sentiment in risky assets strengthened after Chinese authorities eased Covid testing requirements in the cities.
- Note spreads have narrowed by at least 1bp, traders say, putting them on track to lower for a seventh consecutive session and the longest such streak since June
- Dollar bonds of Chinese property companies rose at least 3 cents earlier on Monday, credit traders said, as the outlook for the economy reopened
- No issuer in the region offered new dollar debt
Projections for the week are for $10 billion to $15 billion in investment grade corporate bond issuance, with the first full week of the month expected to be the busiest time in December.
- Full month estimates are around $20 billion
- Supply is expected to slow in the last three weeks of the year, with the December 13 Consumer Price Index report and the Federal Reserve meeting the following day dampening activity.
- The monthly volume is expected to be the lowest December amount in three years
–With help from Harry Suhartono and Josyana Joshua.
© 2022 Bloomberg L.P.
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