Mid-market CLOs are on the rise in the US following the post-crisis slump and offer a good opportunity in Europe, according to Hernan Quipildor, head of CLO origination at Natixis Global Asset Management.
During a presentation at the Creditflux Credit Symposium in London yesterday, Quipildor set out the case for mid-market securitisation arguing that such vehicles offer a range of benefits to investors.
He noted that for investors, securitisations of smaller assets offer greater diversity with more idiosyncratic underlying assets; lower leverage; higher spreads and an interesting risk profile with stronger covenants.
He also added that mid-market debt covers a wide range of instruments and encompasses both quite small and relatively large borrowers – with sizes ranging from $25 million to $200 million with the upper end reflecting the more broadly syndicated loan market.
The assets are less liquid, Quipildor conceded, while also being of shorter duration and repaid more quickly.
“The most successful mid-market lenders are manufacturers of credit rather than buyers of paper,” he said. A strong origination platform with offices on the ground across regions and run by a manager making active credit selections is the essential point, Quipildor said.
The US mid-market CLO market is reviving, he continued pointing to the $7 billion of deals priced in 2014, which equated to 6 percent of the liquid US BSL CLO market in the US. That figure is well down from the 20 percent market share that mid-market securitisations boosted in 2007, but it is on the rise, he added.
Mid-market CLOs have a much longer ramp-up period which can require warehousing facilities of up to two years, said Quipildor, but the spreads on offer are attractive with US triple A-rated tranches pricing at around 160bps to 190bps, versus 140bps for broadly syndicated loan and high yield CLOs in the US.
Europe has not seen many mid-market CLOs but Quipildor said that the potential is there and for managers, CLO sell-down offers a great way of financing further lending.
Hayfin’s €400 million multi-currency Ruby II CLO which was issued in August 2013 is one example of the vehicle in Europe, he added noting that it was made up of 50 percent mid-market assets.