European leveraged-loan managers are benefiting from investor demand with spreads significantly tightening on collateralized loan obligation liabilities. Babson Capital Management's U.K.-based subsidiary Duke Street Capital Debt Management became the second CLO to issue a triple-A tranche below LIBOR plus 40 basis points, said Oliver Burgel, director, structuring at Duke Street. Alcentra's Jubilee IV was the first European deal to price below 40 basis points and a number of other managers have priced only basis points higher.
The triple-A tranche priced at LIBOR plus 39 basis points, while the double-A and triple-B tranches priced at LIBOR plus 75 and 245 basis points, respectively. Burgel described this as being "very competitive" and the "same as a U.S. deal." Duke's CLO investors are a mix of insurance companies, banks, fund managers and high-net worth individuals. Cheaper financing improves the arbitrage between the underlying collateral and the liabilities. This leads to higher equity returns.
The $450 million Duchess III CLO is also Europe's second largest deal, Burgel said. It is Duke Street's third vehicle and the first completed since being acquired by Babson. Though still far behind the U.S., banks are setting up CLO arms and non-bank investors are becoming an increasingly important part of the leveraged loan landscape. NIB Capital Bank, M&G Investment Management, INVESCO Senior Secured Management and RMF Investment Management are now on their second deals. New managers are also on the way. Last week, Simon Hood, who ran ING Capital Management's European-based loan group, joined European Credit Management. He will work alongside Matthew Craston to launch Europe's first open-ended loan fund.
According to Standard & Poor's the highest loan volume ever seen in Europe's leveraged loan market will take place this year. First-half issuance was E35.4 billion, with leveraged buyout activity driving flows. This is a third-higher than in the first half of 2003.