But participants at Wednesday afternoon’s panel of CLO managers at the Global ABS 2015 Conference in Barcelona said that many would like to see easier access to the sterling market.
That could help ease the problem managers face with scarcity of assets, as well as boosting the yield to equity. Credit Suisse Asset Management recently priced a CLO with both sterling and euro tranches, taking a vertical sterling slice itself to comply with risk retention rules.
“Using the sterling strip of retention is one way of accessing the sterling market, which has some very attractive assets in it. It also overcomes the relative inflexibility that a manager has on perfect asset swaps, where if a credit starts to trade down, not only do you take a hit on the asset, but you also have to pay any break costs on the swap,” said Alan Kelly, senior investment analyst at Apollo Global Management.
But rating agencies’ recovery ratings on sterling loans can detract from the benefit, said Jonathan Bowers, partner at CVC Credit Partners.
“Every time we try to structure a deal with a significant sterling tranche it seems to haircut the equity by two or three points,” he said.
“The irony is that the recovery rate on sterling loans is far greater than the rest of Europe combined. And you also get a spread pick-up for the illiquidity premium of 50bp-75bp, generally, so that’s also helpful. This is something we need to try and solve with the rating methodology.”
Ramping problem
But without easier access to the sterling market, it will remain difficult for managers to ramp and manage portfolios. Colin Atkins, managing director at Carlyle Group, said his firm would typically warehouse assets for three months, but that has lengthened to about five months lately.
Risk retention will also slow down the entry of new managers into the space, with regulations generally favouring operations of scale.
Sam DeRosa-Farag, managing director at Kingsland Capital Management, said that there was a further irony in risk retention, in that by forcing managers to hold a piece of their own equity, regulators were actually encouraging risky behaviour by incentivising managers to boost their own returns.
“The regulators are under the impression that [risk retention] will lower the risk — I think it’s going to be the exact opposite,” he said.