Europe’s booming market for collateralized loan obligations has caught the eye of U.S. funds looking to expand overseas.
Credit Value Partners, a Greenwich, Connecticut-based fund managing $2.2 billion, plans to issue CLOs in Europe and has hired former KKR executive Brian McNamara to run its business in the region, according to people familiar with the matter. New York-based credit fund Sound Point Capital Management and Angelo Gordon are also among U.S firms looking to build European CLO operations, said the people, who asked not to be identified because the information is private.
U.S. issuers are seeking to access Europe’s $96 billion CLO market where accelerating economic growth and falling default rates are fueling investor demand. The cost of issuing the debt has fallen to record lows and managers sold $24.6 billion of CLOs in Europe last year, the most since the financial crisis, according to data compiled by Bloomberg. Meanwhile, year-to-date sales are running at more than twice the rate they were at the same point in 2017.
Officials for CVP and Angelo Gordon declined to comment on their plans for Europe. Sound Point and McNamara didn’t respond to requests for comment.
“If you want to grow a business in CLOs, you’ve got a better chance of raising capital in Europe than the U.S.,” said Denis Struc, a portfolio manager at Janus Henderson Group in London whose investments include CLOs. “It is not cheap to set up a new business in Europe, but the appeal is an economy that’s less advanced in the economic cycle, meaning potentially fewer defaults."
The default rate on European speculative-grade debt will be 1% by the end of this year, according to Moody’s Investors Service, less than half the 2.2% it expects from U.S. borrowers.
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This push into Europe adds to a steady flow of U.S. managers crossing the Atlantic that’s accelerated during the past year. New York-based CIFC Asset Management said earlier this month it plans to make a number of hires as part of a European expansion that will include leveraged loans, high-yield bonds and CLOs.
King Street Capital Management has mandated Citigroup for its first European CLO. Voya Investment Management is planning its first post-crisis European CLO via arranger Credit Suisse. Other firms mentioned as looking to build European platforms include Anchorage Capital Group. Anchorage declined to comment on its plans.
"A firm has more chance of building scale if it’s global, and a broader platform is also helpful when trying to raise money from clients," said Andrew Bellis, managing director of private debt, at Partners Group.
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A U.S. court ruling to exempt managers of broadly syndicated CLOs from risk retention regulation may hand the U.S. market a competitive advantage over Europe. This could prompt some U.S. firms to think twice about expanding into the European market, Bellis said.
But Europe’s more exacting risk retention rules aren’t deterring CIFC which is pressing on with its plans even after the ruling.
“There are other reasons why we would still be active in Europe,” said Oliver Wriedt, co-CEO at CIFC. “With the recent ruling, we have re-evaluated our plans for Europe and have determined that we will still push forward with an expansion into the region.”
