€3bn CLO issue starts liquidity trickle

Six collateralized loan obligation funds were launched last week, raising hopes that more liquidity will become available in the debt markets. However, the large pipeline of leveraged buyout debt continues to cause problems in the primary debt markets.

Six collateralized loan obligation funds priced last week in Europe, despite ongoing problems in the debt markets.

The pricing indicated nearly €3 billion of funds had been raised. AIGMezzVest’s fund closed on €1.146 billion; Cairn Capital’s fund on €400 million; The Carlyle Group’s fund on €226.5 million; Faxtor Securities on €300 million; PPM M&G on €350 million and Alcentra on €352.8 million.

A week earlier hedge fund CQS indicated it had raised €450 million, which was €50 million over target. Two other CLOs also released funds to market.

The CLO market has been hit by problems in the collateralized debt obligations market which provides the principal source of investment for CLOs.  Worries about syndicating the estimated $250-350 billion worldwide pipeline of unsyndicated buyout debt have also caused problems for the CLO market.

John Hourican, from Royal Bank of Scotland, said: “There is an absolute glut of paper in the market and the CLO market is getting caught in the backwash of the primary market.” This is because prices cannot stabilise until the current pipeline is syndicated. However, the secondary market affords good deals for those investors able to place funds into the market.

“It is currently business as usual for seasoned CLO managers, but banks are looking again at less seasoned managers or those with a highly ramped portfolio from before the fall in prices,” Hourican said.

Some banks are liquidating warehouses to CLOs. These warehouses are where banks stored CLO assets for managers in the process of bringing them to market.

A source working at a debt provider said: “The problems in the debt markets have led to big portfolio sales of whole warehouses as risk committees seek to reduce liabilities on banks’ books.”
 
He said this may also lead banks to bring CLOs to market earlier than planned. “Cases where banks are taking first losses are more likely to lead to decisions terminating warehouses or closing and securitising the existent portfolios earlier than may be optimal given current CLO spreads,” he said.

Due to the 5 percent fall in prices of the face value of debt, many banks have chosen to sell on debt assets instead of keeping the devalued instruments on their books.    

Last week, Cerberus took on $2 billion of Chrysler second lien debt, and persuaded the seller DaimlerChrysler to take on $1.5 billion, to help complete the deal, according to Reuters. However, the debt markets were struck another blow at the end of last week when it was revealed the underwriting banks on the Alliance Boots deal had failed to place the £1 billion second lien tranche on the deal.