Participants
DR, Indicus There has been more than $73 billion of issuance in the leveraged loan marketplace across 148 deals this year so far. At that rate issuance will far surpass 2005. What is driving this explosive growth?
DFN, Alcentra This has been a watershed year for leveraged loans. As you say, there has been huge growth in volumes and it has been fuelled by private equity capital. About 50% of the market is now funds provided by institutional investors, be they CLOs, hedge funds, credit funds or prime rate funds. An arranging bank looking at selling down an underwriting position at the beginning of 2004 could probably raise €400 million from European-based institutions in the European market. Today it’s more than €2 billion. That means that institutional investors can now drive transactions. And that’s also had a big impact on secondary market liquidity. One dealer estimated that there would be $75 billion of trading of leveraged loans in Europe this year. That’s up from $50 billion in 2005 and $25 billion in 2004. And now a loan CDS market is developing, making it easier for portfolio managers to manage their risk.
TB, Bank of America In Europe, the institutional bid for loans has historically referred to CLOs. Today, there remains a large bank investor component to the market. However some are noticeably selling out of loans via portfolio transactions, sometimes looking to earn CLO fees. More importantly, we are now seeing a wider variety of non-bank institutional investors in addition to CLOs, including hedge funds and non-rated structured funds.
IH, Babson I agree with David that the big driver is the influence of private equity funds. With the vast majority of our assets still sourced in primary syndication, we need to keep close to the private equity houses and the arranging banks.
New investors
DR, Indicus In the four or five years since the beginning of this institutionalization in the market, how has the investor base changed?
TB, Bank of America Two or three years ago the institutional bid for loans in the market was roughly 30%, and 95% of that was typical cashflow CLO vehicles. Today the institutional bid in the loan market is something like 50%, but only two-thirds of that are cashflow vehicles. So, one-third of an increased share is represented by multi-strategy credit hedge funds or alternative structures set up by CLO managers.
DFN, Alcentra The market’s a lot more global now for investors in CLOs. At the start, there was a lot of liquidity out of Germany and Scandinavia, but Asia has opened up significantly this year. Also, of the four funds we’ve raised this year, we haven’t done the usual equity roadshow. They’ve all been reverse enquiry. Now, one of the biggest issues we have is equity allocations on our deals, whereas that used to be the hardest tranche to sell.
LB, Euromoney So the increase in demand is right across the capital structure?
SP, UBS Yes. First there was huge demand for triple-A debt from investors who saw structured credit as an alternative to the traditional way of taking a credit view. For triple-A risk, they got a wider spread. Over the last two years, as they’ve got more familiar with the structured credit product, they’ve moved down the debt structure. We’ve also seen the pioneering buyers of the equity use their experience to bring other, less experienced investors into pooled funds. Investors now understand the positive aspects of the loan market and that’s fuelled this huge increase in demand across the capital structure.
SP, UBS There’s much greater understanding of how CLO structures work. People are going down the spectrum not so much to chase yield, but because they’re more comfortable with the structures, and so they’re comfortable taking the opportunity of that yield.
AK, Harbourmaster Yes. There are more dealers willing to trade in CLO equity, because the market is becoming more transparent. It is trading, and if an investor wants a bid, there are a number of banks that will provide a bid for that equity.
AH, Alegra But there’s a handful of people in the market you can approach who can give you a price, and people should be aware that bid-offers are sometimes wide. A lot is being sold on the basis of Intex modelling assumptions. What may be the investors’ benefit today may become a double-edged sword because someone on the other side may become disappointed. And bad news always travels. That’s why, when you talk to your potential investors, you want to make sure that they understand the mid- to long-term investment horizon of such investments.
TB, Bank of America Arrangers of CLOs are starting to see some differentiation in pricing throughout the capital structure between well-established managers and newer entrants. In the market we see triple-As pricing at 26, 27 basis points over Euribor for some inexperienced managers, and 22, 21 bp for experienced managers. At the equity level, we are told by our investors that some deals involving inexperienced managers are getting done only by agreeing significant discounts. So investors are starting to employ greater scrutiny over deals as the flow continues to increase.
LF, Calyon To a certain extent that reflects the marketization of loans, that is, loans products (including CLOs or low-levered funds) increasingly being included in the portfolio allocations of large pension funds and insurance companies: when these institutional investors shift some of their previous alternative investment allocation to the loan asset class, they obviously understand that buying a classic equity CLO is different from buying a deleveraged fund like a zero to 40%. These investors generally need size: low levered structures usually rely on a larger asset pool and that implicitly means they can be allocated a larger size compared with a classic CLO product.
DR, Indicus That’s what the banks have seen. What about you on the buy side?
