Third-Party Funds Gain Toe Hold in Europe CLOs as Wariness Eases

  • Reticence around such capital backing structured loans wanes
  • Tight triple A pricing of Napier-supported CLO reassuring

Structured fund investors in Europe are warming up to the idea of collateralized loan obligation managers meeting risk-retention regulation through third-party capital, Bloomberg strategist Sarah Husband writes.

More managers may be encouraged to use the funding route as the regulation requiring them to retain five percent of CLO value imposes a significant cost. The agreement reached on Europe’s securitization rules last month, which confirmed the risk-retention floor at current levels, should provide the much-required stability to explore new ways of raising capital.

Rothschild’s Contego CLO IV, which tapped an investment vehicle of London-based Napier Park Global Capital for funds, is the first among a number of issuers lining up third-party retention from the alternative asset management firm. Napier will also be providing equity for ICG’s St. Paul’s CLO V. The firm is also working with two other global managers on their new issue CLOs.

The fact that investors didn’t distinguish between the spread on Contego’s triple A and other CLOs adopting a regular funding model indicates the reticence around such capital meeting compliance rules has eased. The tranches at the top of the pecking order were priced at 88 basis points, just one basis point wider than Alcentra’s Jubilee 18. This compares with the historically tight level of 83 basis points achieved by GSO’s Clontarf Park CLO, with help from an anchor investor.

Triple A liability tops the CLO stack, which bundles together senior-secured loans and bonds. Institutional investors such as pension funds, insurance companies, banks and hedge funds vie for slices of CLOs graded as per seniority.

Turning Point

The opening up of the third-party route and the changing perception toward such funding is a “real turning point”, said Franz Ranero, a partner at Allen & Overy LLP, an international law firm.

Still, there are only a handful of risk-retention providers in Europe, given stiff entry barriers such as a track record of raising loans for onward funding. Besides Napier, Orchard Global Asset Management LLP has also extended capital for CLOs originated in the region.

One deterrent for extensive use of the third-party route is the fee share demanded by such funding companies from CLO managers. Meanwhile, many managers are establishing their own risk-retention funds, including Apollo Ares, Cairn, CVC CP, GSO/Blackstone, GoldenTree and others, limiting the need for retention capital.

“Providers need to be able provide locked up, long term capital, and will require an established and capitalized credit origination business to play a key role in the origination of CLO portfolios”, said Michael Micko, Head of European Credit at Napier Park.

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