New CLO Managers Eye $1.3 Trillion Market, Betting on Return

A flurry of hedge funds, direct lenders and others are expecting a revival of the $1.3 trillion collateralized loan obligation market — and they want to be ready to reap the benefits when it happens.

Buzzy new names in credit like Arini, the hedge fund set up by former Credit Suisse Group AG star trader Hamza Lemssouger, and Sona Asset Management have been marketing their first European CLO deals. In the US, several new managers have sold deals recently, while private lender Antares Capital sold its first deal backed by broadly syndicated loans in August. See table for deal details.

The renewed interest in CLOs, which repackage leveraged loans into bonds of varying risk and size, comes after a very slow year for the market. A dearth of M&A has squeezed the supply of new loans, while a lack of demand for the liabilities has pushed US CLO issuance down about 21% year-to-date compared with the same period last year. In Europe, new deals are down 12%, according to data compiled by Bloomberg.

Profits have also been squeezed for CLO managers over the past year. The lack of M&A meant they’ve had to turn to the secondary market, where loan prices have been rising. That mismatch between loan and bond prices hurt the arbitrage opportunity for CLOs — the gap between the yields CLO managers can earn on the loans they buy, and what they pay to finance themselves with the riskiest securities they issue known as equity.

But the firms setting up CLO platforms now are looking further ahead. They’re betting that the market will recover as interest rates stabilize and deals pick up, and they hope to benefit from the steady income stream the asset class can provide.

“The new CLO platforms are hopeful that when economic activity resumes and therefore new loan supply resumes, they will be fully ramped up to operate,” said Kos Vavelidis, a finance partner at DLA Piper. “Firms are taking steps now to build their platforms and their names in the market.”