Fenton Burgin, Deloitte
The increasing competitive power of direct lending funds in the leveraged finance market, which Euromoney explored in April, is now being keenly felt in the region’s collateralized loan obligation sector.
The size of tickets that funds can now write means that they are in direct competition with CLO managers warehousing deals – and are contributing to record tight pricing for these structures. Borrowers are exploiting terms available for bilateral loans to argue that more liquid and shadow-rated CLO paper should offer a yield differential to direct lending assets. This could drive the market to unsustainable levels.
“We are now in an environment where funds can compete head on with high-yield or CLO-driven options, with an increasing number of direct lenders able to take and hold loans of up to £250 million ($322 million),” says Fenton Burgin, head of the UK debt advisory team at Deloitte in London.
“The markets are certainly now highly competitive and arguably exuberantly so, exceeding the innovation that we saw pre-Lehman’s collapse. It is worth remembering that up to 30% of the deals written immediately prior to Lehman’s collapse in 2007 ultimately ended in default. We’ve seen this film before and it didn’t end well for some parties.”
Arguably, we are right back to where we were pre-Lehman
- Fenton Burgin, Deloitte