Richer spreads on loans and increased interest from investors looking for euro credit exposure have given arbitrage collateralized debt obligations the needed boost to fill the European arbitrage pipeline. Investors have long scoffed at the CDO market in Europe, saying there was a lack of high-yield collateral and liquidity. But pricing and structural developments in the European leveraged loan market are making loans there look more like their counterparts in the U.S. The latest deal to capitalize on increased interest is Prudential M&G Investment Management's E513 million ($458 million) Panther II CDO, which is buying up assets now.
In addition to the Panther deal, four other European cash-flow arbitrage deals have priced in the last month, including a E540 million ($483 million) deal managed by Barclays Capital Asset Management--Jubilee CDO 1. Last year the European market saw a total of $4.6 billion in cash flow arbitrage deals. This year that figure is expected to double. Edward Reardon, European CDO analyst for J.P. Morgan, noted that European leveraged loans are filling the diversification void in the European high-yield bond market.
David Forbes-Nixon, head of Barclays Capital Asset Management and High-Yield Investment Group, said investor demand was so strong on its deal that closed last week that the manager increased it from $500 million to $540 million. "This year there's been a really big change in pricing for European leveraged loans. You've had a number of large transactions with institutional tranches built into them, pricing them closer to U.S. institutional tranches." With higher pricing, European investors have been able to get a higher return on their equity as managers squeeze out a wider arbitrage between collateral and liabilities. "They're offering more juice on the deals," added Credit Suisse First Boston'sPatrick Van Der Borght, who is currently structuring Prudential's deal. He said spreads have been so attractive on European loans that CSFB has pushed back issuance on the liabilities for Prudential's deal until January, so the manager can ramp up attractive collateral in December. The deal was originally set to close this month.
Nixon attributed a rise in pricing and structural changes on European deals to many commercial banks retrenching in the market through consolidation as the number of institutional investors increase. Van Der Borght added that after Sept. 11 more European investors are interested in the euro denominated CDOs as they are looking to reduce U.S. credit exposure. "There's been more interest in equity investment driving the demand for the deals," he said. "Investors involved with U.S. deals have been burned, so there's more interest in Euro credits," he noted.