The market's meatiest topics were up for discussion at the 8th annual Creditflux event in London.
This renowned Credit Symposium is the global credit market's pre-eminent discussion and networking forum. It includes a variety of leading thinkers to address the market's meatiest topics.
Particular highlights are that although 2017 was an incredible year for the Loan and CLO markets, mid-market CLOs have been slower, with the US the main market. Europe should see its first issuance in 2019. The European AAA CLO market has a heavy reliance on Japanese investors and, in general, the quality of CLO loan documentation has been deteriorating.
Booming CLO numbers
The CLO and Loan markets are healthy with regard to deal size and volumes, and 2017 was an incredible year. However, the level of CLO activity may not be justified by the number of loans. In the US, CLO issuance boomed in 2017. This includes reset and refinancing transactions, which have been busy in March and April. The same is expected through June/July and September/October.
However new issuances are far away from 2007 records. In Europe, there are good opportunities for new issuances, as managers have the opportunity to lock long term financing at very attractive spreads. Debt/EBITDA ratios are staying stable, spreads in Europe are going up a little bit, but in the US they are still going down. Expectations are to see issuance levels around €25-30bn in Europe and US$130bn in the US.
Reliance on Asia
AAA grade European CLOs are reliant on Japanese investors, with the rest of the investor base being a stable group. South Korean investors are more interested in AA US CLOs. The Chinese are generally interested in US CLOs. As yet, there has not been interest from the Chinese or South Koreans for European deals.
The quality of loan documentation is deteriorating; for example, 80% of US loans in CLOs were cov-lite in 2017. In Europe the figure was 77%. Documentation review is also becoming more time consuming for cov-lite deals. Although cov-lite deals give borrowers more flexibility, they could lead to lower recoveries when the credit cycle turns.
At the conference, a panel was dedicated to Mid-Market CLOs, which concluded that in reality, the US is where such issuances are seen. Also, mid-market loans, which are historically clubby are becoming syndicated. Such deals are more exposed to the retail sector where turmoil is expected. We may see the first European mid-market CLO in 2019. Banks have started to lend again in the mid-market space, therefore they may need to offload some positions in the next few months. CLOs could be a useful tool for this.
The panel also discussed the comparison between direct lending funds and mid-market CLOs. There is a different investor appetite for leverage and mid-market CLO investors are prone to leverage compared to loan fund investors.
Talk to us
TMF Group has been involved in the loan space from the outset, and understands the factors and risks that come with CLOs, leveraged loans and direct lending.
As one of the largest and most experienced administrators of structured finance entities in the world, we are a one-stop shop that can help you with loan servicing and SPV administration as well as loan administration for companies looking to enter the direct lending market.
Contact us to learn how we can support your company.
Don't let complexity hold you back – here's how we help our global clients take their ventures to new heights.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.