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REFILE-CLO self-syndication still considered a bridge too far
March 14, 2017 / 12:53 PM / 6 months ago

REFILE-CLO self-syndication still considered a bridge too far

(Fixes typo in paragraph 10)

* Buoyant CLO market has scope for disintermediation

* Cutting out banks entirely is difficult, however

* Managers weigh up extra costs and burdens

By Robert Smith

LONDON, March 14 (IFR) - Red-hot demand for CLO debt has triggered talk that disintermediation could become a trend in structured credit, although few believe full-blown self-syndication by CLO managers is on the horizon any time soon.

It is easier than ever to find buyers for new CLO issues, with intense demand for paper in recent months squeezing European Triple A spreads inside 100bp for the first time since the financial crisis.

It is because of this environment, according to one former structured finance banker, that “serial CLO issuers” would be less willing to pay banks to “replicate their investor base”.

“Managers can easily have their own people do that. It’d be an expansion of investor relations, having somebody who not only manages their investor base on a performance reporting basis, but also goes out to them in new issues,” he said.

Self-syndication has been a growing trend across all manner of debt markets, as growing demand for credit has coincided with new regulatory constraints on banks in both primary and secondary markets.

Several private equity firms that frequently issue CLOs are already cutting out banks to syndicate leveraged loans themselves, a phenomenon KKR spearheaded on its Mills Fleet Farm buyout at the end of 2015.

“You want an arranger to bring in new people. You don’t want them paying their bond salesman to make the same call that’s been made 15 times already,” the ex-banker said.

WAREHOUSE ISSUES

If managers wanted to cut out banks entirely, there is nothing technically stopping them. Franz Ranero, a partner at Allen & Overy, said that most managers have the regulatory capacity to arrange and distribute their own CLOs.

“I still think we’d only ever see it very selectively, however, perhaps on smaller tightly held club deals,” he said.

“There are some effectively funding transactions, where friends and family type accounts are willing to provide the leverage on an existing fund, where perhaps some managers may be able to arrange on their own.”

While CLO managers can legally sell their own deals, it is harder than in many other markets to extricate banks entirely from the new issue process.

This is because arranging banks not only spend long hours structuring deals, but they also provide the warehouse - leverage used to purchase the CLO’s underlying loans before it prices.

And banks are likely to be resistant to attempts to unbundle the services they provide during the formation of a CLO.

“If you go to the bank and say ‘I need a credit line, but by the way I‘m not giving you any fees for structuring and syndicating the CLO, as I‘m doing that myself’, the warehouse terms will probably not be optimal,” said Gauthier Reymondier, managing director at Bain Capital Credit.

“At the same time, the team financing the warehouse equity will usually feel a lot more confident that the CLO is actually going to get printed if they see a top-tier bank taking the debt risk.”

Some of the largest managers have permanent lines of capital on their balance sheet that they could use to ramp their CLOs, but several people in the market said there are less than a handful of CLO issuers with this capability.

IS IT WORTH IT?

While some managers have the capacity to self-syndicate CLOs, the key question is whether the fees saved would outweigh the extra administrative burden and costs.

Furthermore, investors may require an incentive to participate in trades executed without banks for the first time.

“It would only work if the economics were passed on to both parties, so effectively it would save the deal money – whether that be upping credit enhancement or offering the deal at a better price,” said Jonathan Bowers, a partner and senior portfolio manager at CVC Credit Partners.

“And then it’s quite difficult to apportion those economics across the whole structure – how would a Double A holder benefit versus an equity guy?”

Another portfolio manager at a frequent CLO issuer said anyone who thought they could gain from arranging their own deals had “delusions of grandeur”.

“We just don’t have anything like the resources that a bank would have in terms of modelling, process, dealing with the ratings agency, et cetera,” he said. “If I‘m going to pay someone 50 or 60bp for that, that’s money well spent.”

Reymondier said that whenever the market is extremely active people ask themselves whether they could self-syndicate deals.

“At the moment, if you issue a notice for a CLO refi or reset, you actually have people ringing you directly to ask if you have paper for them,” he said.

“But when market conditions turn, that’s when you need the banks to go the extra mile to find the less frequent and obscure buyers, or maybe even take some paper on their own balance sheet to sell down later.”

The European CLO market was in a much more difficult place little over a year ago. BlackRock had to widen spreads and jettison a Single B tranche to finally clear its debut European CLO in February 2016, for example.

”It’s almost like an insurance policy - when everything is going right, you may question why you are paying for it,“ Reymondier said. ”But if you’re taking a long term and prudent view, you know there’ll come a point when it’ll be worthwhile. (Reporting by Robert Smith; editing by Alex Chambers, Julian Baker)

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