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The asset manager CVC has raised its largest fund aimed at jump-starting the market for securitising loans to junk-rated companies, in a sign that tight corporate lending conditions may be starting to ease.
The $800mn fund, which will provide the equity needed to support $10bn in collateralised loan obligations, is the largest of its type this year, and one of the largest ever, CVC said. CLOs own roughly two-thirds of the lowest-rated US corporate loans, but many of them are coming up against time limits for making new loan investments.
As banks have cut back on some lending, the $1.35tn leveraged loan market has grown in importance as a funding source for both US companies and private equity deals. The market has slowed down this year, however, with many CLOs reining in debt purchases and seeking tougher terms from borrowers.
Higher interest rates and a dearth of funding have helped push the volume of corporate buyouts down sharply.
“Our expectation is that there will be more private equity transactions in the second half of the year than there was in the first half,” said Gretchen Bergstresser, CVC’s global head of performing credit. “This is the engine that drives the whole market . . . If companies can’t issue either broadly syndicated loans, high-yield bonds, or tap into the private credit market, they can’t buy the companies that they want to buy.”
CLOs buy up hundreds of different loans, package them and use the interest payments they generate to fund new slices of debt, which are then sold on to banks, insurers and other investors.
CVC, with €140bn ($153bn) in assets under management, is best known for its private equity investments. The CLO fund is led by its credit business, which manages €38bn.
This is CVC’s third fund of this type. Using a dedicated equity fund can cut the time needed to issue new CLOs from roughly six months to as little as three weeks, said Cary Ho, CVC’s global head of CLO origination.
That speed has become important at a time when volatile markets have rewarded investors who can take advantage of rapid price moves.
Most of the current junk-bond issuance this year has been companies replacing old debt, with new deals few and far between. Roughly 30 per cent of existing leveraged loans need to be refinanced within three years, but close to 40 per cent of existing CLOs are reaching the end of the period where they can buy more loans.
The CVC fund has already done 12 deals, mostly for companies that are seeking to extend the duration of their loans. Bergstresser said: “We think new issuance is going to increase in the second half of this year, but there will continue to be an extension story dealing with those upcoming maturities.”