This week, Another Fine Mezz gets into the complicated matter of hedge design.
At the end of October, Barings priced the first ever multi-currency European private credit CLO, following a sterling deal from Ares earlier in the year and another from Barings in 2024 in euros.
Cracking the dual-currency challenge brings advantages, particularly opening up a far more diverse pool of borrowers, but then comes the need to find a way to deal with the foreign exchange risk.
Barings went without currency swaps, handling the hedging by issuing liabilities in both euros and sterling. During the reinvestment period, Barings will maintain the ratio of assets to liabilities in each currency.
GlobalCapital reported it plans to reset the deal when its ability to reinvest ends. However, supposing it does not – for economic reasons or otherwise – assets from both currencies will pay down the waterfall in both currencies. That raises a possibility that as loans begin to prepay, the proportion of assets and liabilities in each currency could get out of kilter.
At that point it becomes a trade-off for investors over whether the added FX risk is worth the benefits of adding diversification.
That alone is thorny enough to justify the extend run time on this week’s podcast, before even considering the other matters under discussion: how big can European CLO ETFs get and is a landmark Dutch RMBS the first of many?
Finally, it is the last week to get your nominations in for GlobalCapital's 2026 securitization awards! The nominations form is here.
