Loan Note: CLOs prepare for end of LIBOR; M&A market could see sharp slowdown

With the LIBOR benchmark rate due to be retired at the beginning of 2022, new research reveals how CLOs are adapting. Also: could the booming M&A market be about to experience a slowdown? Here's today's brief for our valued subscribers only.

They said it

“My concern is if a client is looking for yield, there is a reason you’re getting a much higher yield than a Treasury, and that’s an increase in risk.”

Paul Auslander, director of financial planning at investment manager ProVise, tells Bloombergthat private credit products targeted at wealthy individuals aren’t without their risks.

First look

CLOs and the LIBOR transition
Keep a look out for the cover story in our upcoming September 2021 issue, in which we explore the transition away from the London Interbank Offered Rate, which has been the benchmark interest rate used for many loans since the 1970s.

In the piece we examine some of the challenges and practical difficulties of the transition. These are also highlighted in a piece of research from Bank of America Securities (see here, registration required) in relation to collateralised loan obligations.

The research predicts that CLO issuance from the fourth quarter of this year will be based on the Secured Overnight Financing Rate and that this could bring uncertainty over CLO equity valuations due to increased basis risk as well as greater price volatility in periods of credit stress. This underlines the point made in our cover story that the transition could well be a bumpy one.

Is the M&A boom over?
After a windfall for mergers and acquisitions in the first half of this year, with US companies spending $1.74 trillion on more than 9,700 deals according to Refinitiv, one leading lawyer is predicting the market may be set for a slowdown.

“It’s starting to look like the trend line for M&A may be heading to an inflection, where there may be shifting momentum, not all of it positive,” says Thad Malik, chair of the global M&A practice at Paul Hastings. In late summer, he says, things are “starting to feel somewhat different”.

Reasons for caution? Malik names five: the spread of the delta variant of covid denting confidence in recovery from the pandemic; companies beginning to stockpile cash rather than spend it on deals; the infrastructure bill raising concerns over tax hikes; antitrust reviews likely to hamper some deals; and an increase in borrowing costs due to the ending of government stimulus.

But “it’s certainly not the end of days”, says Malik, noting “tremendous demand” for assets as SPACs search for deals and dry powder remains plentiful.

Essentials

JP Morgan hires two to head performing credit arm
JPMorgan Asset Management has created a new Global Perfoming Credit group as part of an expansion of its private credit platform. The new group will be headed up by co-heads Vincent Lu and Brian Van Elslander who both have extensive experience in private credit and private equity sponsor coverage.

Global Performing Credit will target opportunities in direct lending with plans to expand into other private credit strategies in the future.

Lu and Van Elslander will report to head of private credit, Meg McClellan, who said: “With central bank liquidity at historic highs and interest rates remaining low, investors continue to search for sources of yield and downside protection. Global Performing Credit will harness our deep experience in alternative investing and differentiated sourcing capabilities to capitalise on the significant opportunities in direct lending, which have been amplified by current market dynamics.”

LP watch

Institution: Texas County & District Retirement System
Headquarters: Austin, US
AUM: $38.1 billion
Allocation to alternatives: 50.9%

Texas County & District Retirement System has approved $250 million-worth of commitments across two direct lending platforms, according to the pension fund’s recent investment activity reported on its website.

The commitments comprise $150 million to AG Essential Housing Fund II and $100 million to Hayfin Capital Management‘s debut Healthcare Opportunities Fund.

The $38.1 billion US pension fund has a private debt target allocation of 29 percent, which stands at 24.1 percent.

The recent fund commitments by TCDRS have predominantly targeted North American corporate and real estate lending strategies.


Today’s letter was prepared by Andy Thomson with John BakieRobin Blumenthal and Michael Haley.

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