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One Credit Markets deal challenges recession that heads for record year of M&A

(Bloomberg) — A slew of global debt markets defying fears of war, inflation and recession to set a new record for mergers and acquisitions. And its dealers are not yet complete.

The buying frenzy is over collateralized debt obligations, a $1 trillion market that buys leveraged loans and turns them into bonds of varying risk. Carlyle Group Inc. last month nabbed Todd Boehly’s CBAM Partners to become the CLO’s largest manager, while Blue Owl Capital Inc. bought Wellfleet Credit Partners in April to begin its foray into the space.

In the past few weeks there have been at least five acquisitions of US alternative credit outlets that specialize in CLOs or bundles of securitized vehicles. Citigroup Inc. According to U.S. research, this is the highest ever recorded in the calendar and rivals the record for a full year since at least 2010. Europe is joining the trend with two mergers so far.

“Bigger is better for a CLO. Scale matters,” said Mark Jenkins, head of global credit at Carlyle.

Record-setting deal speeds will be impressive in any environment. But this is in stark contrast to the rest of the M&A scenario, which has seen a decline of more than 9% this year as volatility and rising uncertainty around the world continue to mount silent activity.

The flurry of grabbing a CLO shows how popular the high returns seen in alternative credit investments have become. It is imperative for wealth managers to grow up and provide more offerings, especially floating-rate ones, as the Federal Reserve and other central banks expect the fastest rate-growth cycle to occur in decades.

Leveraged loans and CLOs pay a fixed spread over a benchmark rate, and thus are one of the few financial investments of the size that offer some measure of protection against rising rates.

“The broader driver in the alternative credit space has been consolidation,” Jim O’Brien, CEO of Napier Park Global Capital, recently announced the sale to First Eagle Investment Management. “This is driven by both institutional investors investing more aggressively in high-yield alternative credit products and retail investors getting into the alternative credit space.”

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The M&A wave is just getting started. Potential sellers may be eyeing lucrative cash-outs or the comfort of being part of larger organizations.

Among hopeful buyers, Credit Shop Investcorp has been vocal about its desire to buy a CLO manager and was one of the contenders for CBAM. BNY Credit has signed out for a sale on its credit investment arm Elsentra, which has drawn interest from the likes of private equity behemoth KKR & Co, Bloomberg reported.

“We expect to see more CLO manager consolidation globally,” Citigroup analysts led by Maggie Wang cited intense competition as a factor in a recent report.

The deals seem to be coming with a hefty price tag. Carlyle agreed to buy CBAM for $787 million, a whopping valuation of about 13 times the fee proceeds, according to a person familiar with the matter, who asked not to be named because they were authorized to speak publicly. are not.

bigger better?

For some people like Blue Owl, strategy is just getting into the game. Private loan specialists had no presence in widely syndicated loan CLOs, who buy loans and churn out bonds, a market that has doubled in size since 2015. Instead of building them in-house, M&A allows them to ramp up quickly, according to Blue Owl managing director Jerry DeVito.

Citigroup’s Wang said growth is important for CLOs because asset-raising managers outperform peers in both debt and equity performance.

Even for managers who are rapidly expanding their footprint, such growth can come with formidable expenses. According to the firm’s CEO, O’Brien, the prospect of borrowing fueled Napier’s decision to sell itself.

“At some point we will need to broaden our distribution and product base to remain competitive,” O’Brien said. “Our two- to three-year outlook made it clear that we would need to borrow to grow or be part of an acquisition that makes sense for Napier Park and our investors.”

But some investors worry that bigger isn’t necessarily better. When better performing managers are left for better recognized brands, it distorts the market. And those with massive holdings cannot be selective when buying assets, the logic goes.

“I expect more mergers,” said Andrew Lennox, senior portfolio manager at Federated Hermes, who invested in the CLO. “They need scale to build relationships with banks and get allocations. But we take care to filter out managers who are so large that they only buy the leveraged debt market. Scale isn’t everything when it comes to selecting CLO managers.

These deals can come with more than just the CLO. Napier also has a substantial presence in investments such as opportunistic loans and equipment leasing. AllianceBernstein, a subsidiary of Equitable Holdings, will get a large portfolio of private credit assets ranging from distressed debt, emerging market conditions, and real assets like airplanes, ships, and gas rights — and it will expand its geographic reach — along with the CLO of Carvall Investors. also broadens. We

For CarVal, it benefits from access to a lower cost of capital and the ability to hold more assets, rather than the ability to sell them, said Lucas Detour, the firm’s managing principal.

© 2022 Bloomberg LP

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