Neil Servis; CEO of Serone Capital Management, speaks on Panel at the European CLO Summit 2015 in Monaco
The Current State and Outlook for the Global CLO Market
-Europe versus US markets
-New issue market
-Market action and outlook
Key Points from debate:
-US investors are looking for relative value in Europe.
-Harder to see where US market actually is. Energy default cycle will have an impact further down the line, and isn’t over. Don’t think one should be taking view on this through structured credit in any case.
-Credit risk in Europe is more idiosyncratic, US more sectoral at present.
-US could face a situation where downgrades cause forced selling within CLOs, and equity cash flows being turned off.
-Stability of arb in Europe better than US.
-European credit markets more likely to turn down aggressive issuers, whereas in US it’s a matter of price.
-Issuance will be challenging. CLOs are being hampered by liability spreads moving out. Loans have not cheapened in pace with tranches.
-A lot of deals in the pipeline going into Q4 2015. Banks trying to get them done by year end. The better managers will succeed to the detriment of newcomers, and less well perceived players. Not seeing warehouses being unwound just yet, with 2.0 prices are more stable than 1.0.
-Most challenging time since 2.0 market started. Need to concentrate on AAA side. Increase client base to Asia and Japan. Repacking AAAs into different currencies, which leads to a 30bps pickup.
-Multi-currency Euro CLOs would be very interesting, and positive development for market as diversity would improve. This could bring in new investors.
-Fundamentals not changed from 12m, or 6m ago. Pricing is very technical.
-Volatility is creating opportunity. European QE is a big plus, and Euro collapse talk has abated again. Crowding out in ABS will move players into CLOs. Still bad press on CLOs.
-Real money unlikely to enter mezzanine space any time soon. Keeps market inefficient.
-Managers are finding ways to issue even with new regulations like risk retention.
-Have investors hitting manager limits.
-US manager consolidation not as big an issue as in Europe. We would welcome new managers in Europe.
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