Arini debut shows promise not pain for euro CLO market
New managers emerging, even if they pay up for inaugural transactions, show there is a price for every asset
When European CLO debutant Arini offered a spread of 190bp and fellow new manager Sona paid 185bp on the triple-A tranches of their inaugural deals this month, they were paying a hefty premium to recent plain vanilla big manager deals. For instance, this week Investcorp printed a deal with a spread of just 171bp.
One CLO manager described paying a premium of 15bp-20bp to established managers, which until recently was unusual in Europe, as "tough".
Yet this differentiation should be celebrated: it is a sign of a maturing market. What's more, there was also nuance to pricing down the stack, with some of Arini's mezzanine tranches landing inside where experienced manager Barings issued a deal on November 3.
For years, European CLO investors have been known for moving more or less as one. Deals that came to market at the same time were priced with the same spreads, almost regardless of who issued them. New issuers did pay up versus established managers, but usually by just a few basis points.
Signs that this is changing are to be encouraged. For one thing, if European CLOs as a whole are to attract much-needed new capital, they needs to be able to show that this is a discerning market in which portfolio managers have the option properly price risk. They should be rewarded for taking risks and accept lower returns for safer investments.
Indeed, the fact that Arini was able to price a deal — and to a broad range of investors — is a success in itself. It means that there is a price at which investors are willing to support a new deal in a difficult market. Without spread differentiation, Arini and Sona may not have been able to price at all.
Some more established players may turn their noses up at the newbies supposedly paying up for entry, but everyone should benefit from a more sophisticated investor base. This evolution is therefore a good omen.