Proprietary trading desks at banks are becoming increasingly more involved in the loan market and several are looking to do a collateralized loan obligation. Although they have slowly been buying more loans, the recent Ford Motor Co. credit seems to have been somewhat of a watershed for their involvement. Prop desks across the market took on a lot of Ford paper, with one supposedly buying as much as $400 million. One desk has already started investing in CLO paper and has hired a portfolio manager.
CLOs could be attractive to prop desks because they provide more permanent capital and help generate fee income. Loans certainly seem to be on the menu for most. "Prop desks are funded hedge funds, so I would definitely expect prop desks to continue [to invest in loans]," one investor said. "Look at new issuance in terms of high yield, bank loans are surpassing them. At some point you have to start focusing on bank loans." Winchester Capital Principal Finance, a principal investing group in Deutsche Bank's global markets division, has done CLOs.
One portfolio manager said it is interesting how non-traditional loan buyers, such as prop desks, are moving into the space. "I think that might be the story of 2007, the explosion of new entrants into this asset class," he said. He cited Ford, estimating that only about 20% of investors in the deal were "traditional" loan buyers, such as CLOs. About 80%, he said, went to what he dubbed "non-traditional buyers," such as hedge funds, high-yield bond funds and prop desks. "[The banks] are getting huge tickets from prop desks," he said. When Ford broke for trading a lot of prop desks and hedge funds sold their allocations (CIN, 12/18).
