A slight tightening across debt tranches was enough to send European CLO managers rushing to the primary market in the past month, bringing deals that many did not expect to materialise before September.
Bridgepoint was one, pricing Europe's most recent CLO last week with the tightest spreads of the year for the tranches rated BB and BBB. The most senior AAA tranche was priced at 180bp, slightly outside initial price talk and also 5bp wide to certain other recent deals — but still one of the tightest since March.
GlobalCapital spoke to John Murphy, partner and head of syndicated debt at Bridgepoint Credit about the deal, the market and the firm's future plans.
GlobalCapital: Bridgepoint just priced its first CLO in 2023. How did the deal go?
John Murphy, partner and head of syndicated debt at Bridgepoint Credit: Obviously, we are delighted to get a deal done. From a leveraged loan perspective, supply has been very light but there has been a little more activity over the last few months, and we really feel that there is going to be more of a pick-up from the back end of the third quarter into the early part of next year.
For that reason, we were keen to get the deal printed at this particular time to give us firepower to ramp in that period that is going to bring some interesting opportunities.
The results of the deal were only announced early last week, a few days later than people in the market expected.
During our results call for the first half, we mentioned that we were looking to price the next deal in Q3, so we’re a little bit ahead of schedule. In terms of the couple of days that you mentioned, the book was done at the end of last week, but we were trying to optimise pricing across the stack. It often just takes a little bit longer to go back and forth with investors at that point. From my perspective, the support in the triple B and double B tranches was particularly pleasing, with both tranches achieving the tightest pricing of the year.
The strength of the high-quality portfolio construction that we’ve achieved under the programme from our four deals over the past two and a half years is evident in our having the highest weighted average price of all European CLO portfolio managers. This also explains why we were able to achieve such tight pricing in the riskier parts of the capital structure.
New investors on board
We’ve seen people take different approaches to placing their most senior tranches. Investcorp had a Japanese anchor for all of it, Bain syndicated most of it, Polus Capital was somewhere in between. How did you make sure your triple As are placed?
In order to have a successful transaction, you need to pre-market the AAA and that is what everyone is doing. By the time you come to the market, you tend to have a relative high amount of interest in the triple A tranche and confidence about where you’re going to price.
We tend to take a broadly syndicated approach with our bookbuild, and that is how we approached this transaction as well. We had broad interest in all of the tranches across the capital structure, from existing investors, but just as pleasingly, from a number of new investors that have come on to the platform.
How would you characterise what makes your approach to portfolio building different from others?
We take a consistent investment approach across the credit platform as a whole, which includes credit opportunities, direct lending and the syndicated debt business, which is where the CLO strategy sits. We’re always seeking to build strong defensive portfolios that will perform through the cycle.
We do that by focusing on our core strengths. One of our primary differentiators is the Bridgepoint Knowledge Bank that is utilising all the enhanced diligence elements that we have at our disposal to better inform our investment decisions. We have a broad network of offices globally, with particular focus on continental Europe. Having that local knowledge on the ground is hugely beneficial for us.
We also have a broad industrial advisor network of senior professionals who can really give us more detailed insights into such aspects as competitive dynamics and industry themes beyond the basic investor information pack that we receive from the arranging bank in the context of any leveraged finance transaction.
Then there are two other elements: Bridgepoint has more than 60 portfolio companies, often in sectors in which we invest. That gives us a lot of additional information.
CLOs are by nature very diversified vehicles, but we try to pivot the portfolio to our areas of expertise, so you will see a strong focus on healthcare, services and tech in Bridgepoint CLO portfolios.
Some other CLO managers I have spoken to are growing more sceptical of the healthcare sector because of the high levels of leverage and the impact of inflation.
Healthcare is one of the biggest sectors in the leveraged finance market and it’s pretty broad in terms of companies. Whilst we like the sector, it is important to focus on those business that we think have the characteristics to operate in a challenging environment.
Last week, Fitch predicted 4.5% defaults in European leveraged loans for the year. Do you think that was exaggerated?
Never predict default rates!
What I would say is that rating agency default rate mechanisms are driven by statistical models and what they see in their rating buckets. As managers, we tend to look more at the underlying fundamentals of our portfolios and take a bottom-up perspective.
If you look back at the great financial crisis, the default rates through the cycle from a CLO perspective were actually below 2%, while rating agencies were calling 6% and more. I think the CLO market will always outperform the broader market because of the actively managed nature of the product.
There are other dynamics that are going to mitigate and limit where defaults will go. One is documentation. We’re essentially a covenant-free market these days. There is no real handbrake for borrowers and sponsors, nothing to force them to come around the table.
That can have a twofold effect. One, it can give companies, management teams and sponsors more flexibility and freedom to focus on operational aspects, which is positive.
The negative side is that to the extent that the company is underperforming, the sponsor will run the option as long as they possibly can. In that scenario, there is not a lot left by the time that default comes because it’s the lack of liquidity that will drive the default.
I would say defaults as a percentage will be quite contained, but I think when businesses do default, recoveries will be lower than what we’ve seen historically.
You joined Bridgepoint in 2020, when the company bought EQT Credit. How is the business evolving across the different strategies?
It’s been an incredible journey. We’ve seen all the strategies grow pretty impressively since we came over. The credit business has grown by about 75% since it was acquired by Bridgepoint, and I think that is a reflection of the strong performance historically of all the strategies, the strong team across all of them, and the support that we’ve had from the broader Bridgepoint organisation.
I think that the diligence angles and the Knowledge Bank that I mentioned really resonates with investors in this environment.
Middle market CLO possibility
Bridgepoint has a direct lending business with around €7bn of assets under management. Are you exploring options for middle market CLOs in Europe?
We’re keeping an eye on it. In Europe, we need to figure out a couple of things in order to make it work: how to rate all of the underlying assets held in the portfolio, and how to build enough diversity in the portfolio to make it work. These are the two key elements that need to be resolved, but I think it will happen.
What is the next milestone that you want to achieve?
Our CLO business is at the relatively early stages. I’m focused on successfully rolling out our business, and that combines two parts: one is our continued issuance of CLOs under the programme; the second is our successful capital raise with respect to our captive equity vehicle.
We are also laser-focussed on monitoring how our portfolio performs in this environment. You’re only as good as the performance of your underlying portfolio.