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June 30, 2017  

European Buysiders Sizing Up US CLOs

European investors are showing an increasing interest in U.S. collateralized loan obligations.

While the amount of capital deployed so far has been modest, issuers said they have been talking to banks and pension systems in the U.K., Germany, France, Switzerland and some Scandinavian nations. Most of the discussions have revolved around senior paper.

The activity has been reflected, in part, in moves by some managers to structure their deals so that they comply with both the Dodd-Frank Act’s risk-retention rule and a similar European Union directive. Among them: a June 23 transaction in which Marble Point Credit refinanced a CLO originally issued by American Capital.

CIFC also achieved “dual-compliant” status for a new $587.5 million CLO that it priced on March 28 with Morgan Stanley running the books and a $713.3 million transaction it completed on June 2 via Citigroup. The New York firm even is seeking to establish a European presence by opening an office in London, even though it has no plans to securitize European loans.

One possible downside to dual compliance: Should the Trump Administration move ahead with a possible reversal of the Dodd-Frank rule, an issuer that also adhered to the E.U. measure would be unable to capitalize by selling its retained positions. As long as the transactions are economical under current regulations, however, the view of most managers is that they should move ahead. “Our attitude is the [Dodd-Frank] rule is in place, so let’s make the best of it,” one manager said.

Several factors are at play in drawing European investors toward U.S. CLOs. With new-deal supply in the States on the upswing, issuers want to ensure they have an audience for their offerings. At the same time, European investors are looking for alternatives to their home markets, where supply is light and spreads are tight.

Indeed, U.S. issuers are selling new five-year CLO securities with triple-A ratings for about 125 bp over three-month Libor — about 25-35 bp wider than prevailing levels in Europe. While currency swaps cancel out some of that difference, the costs of those contracts have shrunk this year. Big banks also can tap internal resources to arrange the swaps, or even skip them altogether.

“The principal driver of the appetite is that investors want to diversify away from European CLOs, and they can do so into a larger, more-liquid market that offers a better spread,” another issuer said.