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April 05, 2019  

AllianceBernstein Seeks Larger CLO Presence

AllianceBernstein is getting into the business of securitizing broadly syndicated leveraged loans.

The effort is in the early stages, with AllianceBernstein poised to hire a senior portfolio manager to help oversee the offerings after several months of interviews. The program would complement a business in which the New York asset manager already issues collateralized loan obligations backed by loans it writes to mid-size businesses.

While details remain under wraps, the initiative comes as a few other deep-pocketed shops are preparing similar issuance programs — moves that appear to be at odds with market trends. After all, spreads have been widening to the point where it has become difficult to squeeze arbitrage gains out of new deals, even as leveraged-loan yields also have risen. And industry participants see it as inevitable that a loosening of lending practices in recent years will cause asset performance to deteriorate.

From that standpoint, AllianceBernstein and others including AGL Credit and Morgan Stanley Asset Management may be entering the market too late. But from those operations’ perspectives, their moves are well-timed.

The thought is that AllianceBernstein and the other newcomers would build their issuance programs quickly, allowing them to subsist on existing fee income should a market downturn temporarily choke off issuance. That strategy hinges on the idea that leveraged-loan defaults have been holding steady at around 2%, and are unlikely to change in the immediate future thanks to a recent trend in which refinancing efforts by borrowers have extended the lives of their debts by an average of two years.

Also employing that approach is Elmwood Asset Management, led by former BlackRock CLO co-head Adrian Marshall with backing from Elliott Management. The firm is the only CLO issuer to debut in the market this year, having completed a $499.4 million offering on Feb. 14. Working with bookrunner J.P. Morgan, it followed up this week with a $750 million offering that was quickly expanded to $1 billion. “You want to build critical mass with new businesses before the market turns, push out four deals so that the platform is generating positive returns,” one issuer said. “I’m not expecting a downturn for 12-24 months, and if you had asked me two years ago, I would have told you the same thing. I’m not sure how long we keep kicking the can down the road.”

AllianceBernstein and its peers also likely see an opportunity to step in after more than a dozen smaller issuers either sold their operations or shut down amid struggles to comply with the Dodd-Frank Act’s risk-retention rule — which was revoked for CLOs in 2018. “They may be just in time,” another issuer said. “If they can get a deal or two off they can collect their fees for five years and take advantage of the volatility that is sure to come.”

CLO issuing programs additionally can add diversity to the offerings of major asset managers like AllianceBernstein or Morgan Stanley Asset Management. And it helps that the prospective issuers have considerable financial resources. Indeed, AllianceBernstein has more than $500 billion under management. And AGL, led by CIFC founder Peter Gleysteen, is getting capital from Thomas H. Lee and Abu Dhabi Investment Authority.

One issuer said he is using the players’ emergences as a pitch to bond buyers, telling them it will be important to stick with experienced portfolio managers when conditions eventually deteriorate. But he too expects more issuers to enter the market, noting that CLO programs can be easier to establish than other securitization-issuing efforts due to lower licensing and personnel needs, and the lack of risk-retention controls.

As an issuer of CLOs backed by its mid-size loans, AllianceBernstein has completed $1.4 billion of deals since 2016. It also priced a single CLO for $350 million in 2007. What’s more, the firm invests in other issuers’ deals.

As for Morgan Stanley, it hired longtime market professional Michael Feeney last week as a senior portfolio manager. Feeney most recently helped insurer Assurant establish a CLO-issuing program that has produced four deals totaling $1.8 billion since 2017.