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Loan Note: Oaktree highlights changing dynamics for bonds and loans; leveraged finance issuance drops in Europe

An Oaktree roundtable discusses how bonds have been quicker to adjust to market circumstances, but loans are expected to catch up. Plus: declining leveraged finance issuance seen in Europe and Octopus closes its latest real estate debt fund. Here's today's brief for our valued subscribers only.

They said it

“With the global carbon budget being rapidly run down, now is the time for comprehensive, determined action”

Mark Carney, Brookfield vice-chair and head of transition investing, speaking as the firm announced it had raised $15 billion for its inaugural Global Transition Fund – the largest private fund raised to support the transition to net zero.

First look

Mind the gap: high yield spread widening not yet migrated to loans (Source: Getty)

Loan market yet to catch up with bonds, notes Oaktree
The spread widening seen in the high-yield bond market has not yet happened in senior loans but there is likely to be an “equalising moment” in loan spreads at some point, attendees heard at a roundtable hosted in London by Oaktree Capital Management yesterday.

Takeaways from the roundtable, which featured senior executives Armen Panossian, Madelaine Jones and Justin Guichard, included the following:

Bonds have been quicker to adjust to changed market circumstances and have seen more repricing than in the loan market. This is because loans tend to be mostly deposited in collateralised loan obligations and there is less liquidity than in the bond market. But loans will eventually catch up with the disruption in the bond markets, and this may happen first in the form of redemptions and outflows from more liquid, non-CLO holders of loans such as exchange traded funds and some institutional investors.

While there have been sell-offs in the high-yield bond market, the quality of the market overall has increased with the proportion of BB paper growing over the past decade, while the proportion of CCC has fallen. There have also been a lot of high-quality, senior-secured loans issued but there is a “tail end” of loans in the leveraged buyout market that have been “too highly leveraged and will be the defaulters of the future”. However, the fallout is not expected to be seen just yet.

The CLO market was boosted during the pandemic due to the liquidity that poured into bank reserves and prompted those banks to invest in AAA-rated securities. But CLO issuance has fallen this year as the banks have pulled away in anticipation of quantitative tightening. Oaktree said it has a strong focus on CLO equity where returns have historically been higher during periods of dislocation. But it’s only attractive “if you’re able to stomach volatility over the next six to 18 months”.

Terms have not improved for sponsored buyout-focused direct lenders versus last year despite increased risks, with bonds reflecting these increased risks somewhat better. Oaktree believes there is better value to be found for direct lenders in the non-sponsored market and cites life sciences as “very attractive as it’s not correlated to GDP. If you’re great at scientific innovation and your products save lives, then they will be purchased”.

European bond, loan issuance falls
Europe’s high-yield bond and leveraged loan issuance both tumbled in the first quarter of 2022, according to the latest data from The Association for Financial Markets in Europe.

Overall, European leveraged finance issuance (including high-yield bonds and leveraged loans) recorded €56.6 billion in proceeds in the first quarter, down 36.2 percent compared with the €89 billion recorded in the fourth quarter of last year and a near-50 percent fall on the €113.3 billion total in the first quarter of last year.

High-yield bond issuance totalled €16.9 billion from 38 deals in the first quarter, down 57.4 percent on €39.3 billion from 90 deals in the fourth quarter of last year. Meanwhile, leveraged loan issuance stood at €39.8 billion in 99 tranches in the first quarter, down 19.2 percent from €49.3 billion in 126 tranches in the fourth quarter of last year.

According to Covenant Review, 57 percent of all leveraged loan deals reviewed in the first quarter of this year contained some kind of ESG feature, less than the 68 percent of all deals reviewed in the fourth quarter of last year.

Essentials

Octopus hits hard-cap for latest fund
UK property lender Octopus Real Estate held a final closing on £500 million (€582 million; $613 million) for its Octopus Commercial Real Estate Debt Fund III.

CREDF III focuses on originating short-term loans secured against UK commercial property with target sectors including logistics, purpose-built student accommodation, supermarkets, retail warehousing, residential development land and hotels.

The fund received commitments from investors including pension funds and insurers across the UK and mainland Europe. “We are delighted to hold a final close at our hard-cap despite the headwinds being faced in the capital markets,” said Ludo Mackenzie, head of commercial lending at Octopus Real Estate.

Boom year for Investec
Investec Real Estate revealed it had lent £1.2 billion in the year to 31 March 2022 across 85 loans, representing a year-on-year increase in lending activity of 271 percent.

The £1.2 billion included £524 million of investment finance and £472 million of development finance, with commercial real estate accounting for 55 percent. Sectors targeted included residential for sale, build to rent, mid-box logistics, purpose-built student accommodation, office, mixed-use and retirement living.

Investec said the record level of activity “demonstrates the ongoing demand from UK real estate borrowers for flexible financing solutions from experienced lenders and the outperformance of the asset class despite unprecedented macroeconomic challenges”.

Double hire for ICG
London-based fund manager ICG has made two appointments to its Senior Debt Partners team, with Nick Kogevinas and Benjamin Zülch joining as managing directors in London and Frankfurt, respectively.

Kogevinas has 19 years’ experience in leveraged finance across the UK and US, most recently as part of Citigroup’s leveraged finance team for 15 years originating sponsor and corporate leveraged financings in Western Europe. He takes responsibility for SDP’s UK market and sponsor coverage.

Zülch will cover the origination and execution of investment opportunities in Germany, Austria and Switzerland. He joins from fund manager Hayfin where he was a managing director in the private credit investment team for 11 years.

ICG closed its Senior Debt Partners IV fund towards the end of last year on around €8.1 billion.

LP watch

Institution: District of Columbia Retirement Board Headquarters: Washington, DC, USAUM: $11.01 billionAllocation to alternatives: 15.1%

District of Columbia Retirement Board has confirmed a $100 million commitment to Fortress Lending Fund III according to minutes from the pension’s May 2022 board meeting.

This is a first-time commitment between DCRB and Fortress Investment Group.

DCRB currently allocates 0.4 percent to private debt, while its target stands at 3 percent. Its previous fund commitments range between $25 million and $100 million, predominately focused in Western Europe.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal.