European managers seem to be finally catching on to the leveraged loan concept, with approximately nine collateralized loan obligations in the pipeline scheduled for late 2002 or early 2003, including a debut 100% European-loans only deal for Prudential M&G. But this vanguard of managers all looking to launch deals is raising concerns over the amount of collateral available in the market. "Supply is definitely an issue," said Anjali Bastianpillai, associate director of Standard & Poor's structured finance group. "A lot of deals may have the same collateral and so it is difficult to gain diversity," she said.
But leveraged loans are one of the few asset classes available in Europe appropriate for a highly leveraged vehicle such as a CLO or CDO, stated Sara Halbard, executive director of Intermediate Capital Managers. "The poor performance of bond deals from 1999 has rendered it virtually impossible to issue a CBO of European sub-investment grade bonds. Bond buckets in recent CDOs have been restricted to a maximum of 10% of the portfolio," Halbard added.
ICM decided in late 2000 to move away from issuing bond deals and issued the loan backed Promus I in September 2001 and is now buying assets for this CDO and a new deal, Promus II. About E239 million has been invested in the first vehicle out of a total size of E450 million. About E119 million of Promus II has been invested with the deal expected to be E340 million. Halbard reiterated there is a lack of a secondary market in European loans and an uncertain pipeline going forward for new issue.
ICM, however, is working around this. Promus I and Promus II are both structured differently from other CDOs. "A syndicate of banks provides a revolver, which allows us to acquire the collateral on an ongoing basis. As long as pre-set covenants are being met, notes can be issued to pay down the revolver. Issuing notes at different points in time and maintaining the revolver enables the vehicle to ramp-up over a more extended period," she explained. "This allows us flexibility to build a conservative portfolio without compromising on credit quality. ICM issued E65 million of triple-A notes last month for Promus II, however, Halbard declined to disclose pricing on the notes issued by J.P. Morgan. She acknowledged that issuing notes intermittently does increase the risk of market movements.
Other managers disagree supply will be an issue. Mark Mink, a portfolio manager with Swiss firm RMF Investment Group, which has recently issued notes for the EUR300 million collateralized debt obligation, RMF Euro CDO, noted the European market is offering a very good pipeline for leveraged loans. "This is an environment conducive to asset divestiture among the large conglomerates," he noted (LMW, 11/3).