Credit Suisse Group AG (CSGN) is seeking to raise a 300 million-euro ($388.1 million) collateralized loan obligation for London-based Cairn Capital Ltd. in Europe, marking only the third time such a fund has been issued in the region since 2008.
The bank is in early stages of the transaction, which may consist entirely of euro-denominated assets, according to a person with knowledge of the deal, who asked not to be identified because it hasn’t been announced publicly.
Europe has seen just two CLOs issued in the past four years, according to data compiled by Bloomberg. Deutsche Bank AG arranged one in 2011 for European Capital and Intermediate Capital Group Plc (ICP) issued a fund in 2010. Sales of European CLOs peaked at 35 billion euros in 2007, Fitch Ratings said. Demand for the debt froze in 2008 when investors shunned hard-to-value assets during the worst financial crisis since the 1930s.
“The first and most obvious reason there has not been a pickup in CLO activity in Europe is that the arbitrage economics for the equity doesn’t work,” Rishad Ahluwalia, head of global CLO research at JPMorgan Chase & Co. in London, said in a telephone interview. “There isn’t enough excess spread to do a European CLO today. The cost of CLO financing, given where CLO spreads are, is just too wide to where loans are pricing in Europe.”
Zoe Watt, a Cairn Capital spokeswoman in London who works for Holloway & Associates, and Adam Bradbery, a London-based spokesman for Credit Suisse, declined to comment.
The spread on euro CLO AAA debt was 190 basis points more than the euro interbank offered rate, according to JPMorgan data. The average spread on new-issue euro institutional loans for the three months ending Sept. 30 was 497.5 basis points more than Euribor, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data. A basis point is 0.01 percentage point.
New-loan issuance in Europe also lags behind the U.S., making it difficult to create a diversified pool of debt in which a European CLO can invest, Ahluwalia said.
Borrowers in Europe raised $77.5 billion of leveraged loans this year, down 50 percent from the same period in 2011, Bloomberg data show. In 2007, at the height of the buyout boom, $339 billion was raised through Oct. 2.
There have been $409.8 billion of leveraged loans arranged in the U.S. this year, compared with $501 billion in the same period of 2011 and down from $692.2 billion through Oct. 2 of 2007, the data show.
In the U.S., 71 funds backed by widely syndicated loans for $30.8 billion have been raised this year, the most since 2007, according to data compiled by Bloomberg and Morgan Stanley.
CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.
JPMorgan said that $35 billion of CLOs may be raised this year, increasing its forecast from $30 billion. Issuance may reach $50 billion to $60 billion globally in 2013, the bank said in a Sept. 7 report.
The price of AAA rated CLO debt in Europe rose to 94 cents on the euro in August, the highest level since January 2008, according to Morgan Stanley data. The debt dropped to as low as 69 cents in April 2009.
AAA CLO debt in the U.S. rose to 95.25 cents on the dollar in August, the highest level since June 2011, according to the Morgan Stanley data.
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