New managers CLO-g market

A SPATE of hedge funds and asset managers are diving into the US$1.3 trillion collateralised loan obligation (CLO) market with debut vehicles, fuelling demand for new leveraged loans and pushing up prices for older ones.

Macquarie Asset Management sold its first US collateralised loan obligation earlier this month, while hedge fund Arini, run by former Credit Suisse Group AG star trader Hamza Lemssouguer, priced its debut US CLO in April.

Anthelion Capital, an artificial intelligence-based asset management platform, is also looking to come to market in the next few weeks and has tapped Natixis SA to help arrange the deal, people with knowledge of the matter say.

Fresh cash is helping drive up demand for the limited number of leveraged loans Wall Street banks have brought to market in recent weeks amid the tariff-induced volatility.

That includes a US$2bil loan supporting QXO Inc’s acquisition of Beacon Roofing Supply Inc that drew so much interest it was upsized to US$2.25bil. A loan to American Airlines Group Inc was similarly increased by 25% to US$1bil in recent weeks.

Demand from CLOs, along with easing trade tensions, is also pushing loans on the secondary market higher.

“It really feels like we’re back in the situation where demand for CLO debt is going to outpace supply,” says PineBridge Investments’ Kevin Wolfson, who manages the firm’s CLO portfolio.

“From a loan supply perspective, unless we really see a material pick-up in new issue loan supply, CLOs are going to have to turn to the secondary market.”

CLOs, bundles of junk-rated debt that are sliced into bonds of varying risk and return, are the biggest buyers of leveraged loans, scooping up about two-thirds of all deals in the United States.

Vivek Bommi, head of leveraged credit for Macquarie Asset Management, says that the recent bout of volatility wasn’t a deterrent for the firm as it rolled out its debut US product.

“There’s a difference between volatility and economic stress,” he says. “Volatility is very good because you’re able to actively manage and generate performance,” he adds.

Mehdi Kashani, Arini’s head of structured credit, is also unfazed. “The loan market had actually sold off quite a bit, and we were able to source good quality assets at great prices,” he says.

Representatives for Anthelion and Natixis declined to comment.

More CLOs seem to be teeing up, which is also helping demand for leveraged loans.

There’s been a steady increase in the number of temporary lines of credit, known as warehouses, that collateral managers use to accumulate assets before launching their products.

Open warehouses are running well above their historical average in the United States and are at a record in Europe, according to data from Barclays Plc. Notable money managers to register debut warehouses in Europe this year include Silver Point Capital, Diameter Capital Partners, and Elmwood Asset Management.

A representative for Diameter declined to comment, while Silver Point and Elmwood didn’t respond to requests seeking comment.

“You’re seeing lots of warehouses open at the moment,” says James Baillie, a partner in the structured credit practice at law firm Paul Hastings.

“Part of that’s because managers have more than one warehouse open at once, so that when there’s volatility and the market is favourable they can buy assets low,” he adds.

Nonetheless, a number of managers are choosing to wait before issuing new CLOs.

Spreads on CLO bonds rated AAA, which make up the largest portion of the structure, remain relatively wide compared with loan prices and need to tighten further to make the economics work, market participants say.

An improved arb – the gap between the yield CLO managers get on the loans they buy versus the rate they have to pay on the debt they sell – will help lure CLO equity buyers, who earn the residual income after all the debt is serviced and are key to financing the structures.

“If you model out returns for equity, it still works, but I think it’s a little less attractive than it was before,” Wolfson says. — Bloomberg