Faced with a wave of redemptions and market turmoil, the private credit industry is leaning into a classic Wall Street maneuver: securitization.
Private credit firms are issuing collateralized loan obligations at a near record pace, despite unease over a potential rise in defaults and exposure to AI-threatened software firms. Issuance of the deals — which package private credit loans into bonds — has reached $9.5 billion so far this year, just shy of 2024’s record first quarter, according to data compiled by Bloomberg.
The private credit market has turned to CLOs for funding for years but a wave of redemptions — most recently at two Blue Owl Capital Inc. funds — and banks restricting some lending has focused attention on the practice. Because CLOs sell long-term bonds that can’t be redeemed at short notice, they ensure managers have cash to keep lending even if funding dwindles elsewhere.
“There’s a drive to diversify the capital stack away from just banks or the unsecured market, and find diversified funding sources,” Victoria Chant, global head of capital markets and bank relations for Blackstone Credit and Insurance, said. “That’s what’s driving some issuance.”
Chant said she expects the size of the private credit CLO market to expand further this year.
In private credit, the vehicles function primarily as a funding tool, allowing managers to securitize their own private loans. By contrast, broadly syndicated loan CLOs are designed to capture the spread between asset yields and funding costs while generating management fees from externally sourced debt.
According to Citigroup Inc. analyst Steph Choe, private credit CLOs — particularly the senior tranches — generally provide cheaper funding than alternative sources such as revolver facilities.
That comes in handy especially with some banks pulling back. JPMorgan Chase & Co. is restricting some lending to private credit funds after marking down the value of certain loans in their portfolios.
Recent Deals
Private credit CLO deals have taken up an expanding portion of the $1.8 trillion market, as investors sought higher returns amid scarce yield. Such deals are often planned months in advance, and have also been issued in years when redemptions weren’t an issue. Investor appetite for recent deals has been strong, despite the negative sentiment.
The current skittish market has also offered opportunities. Blackstone Inc.’s flagship private credit fund, BCRED, sold a CLO recently to capitalize on market pricing. The deal — which was first planned months ago — won enough demand to boost its size by $50 million, Bloomberg reported in late March.
BlackRock Inc.’s HPS Corporate Lending Fund — one of the largest non-traded business development companies — priced a roughly $748 million CLO in late February. The deal’s senior most tranches sold at 140 basis points above SOFR, tighter pricing compared to current market levels. The fund, known as HLEND, also sold a $1.25 billion CLO early last year.
The HPS Corporate Lending Fund capped investor withdrawals at 5% after client requests rose, it said in early March. At that time, BlackRock said the step was in line with its existing liquidity management for the vehicle and a “foundational” feature of the investment.
A representative for BlackRock declined to comment.
Apollo Global Management Inc.’s $25 billion retail-focused private credit fund secured a $500 million credit line with plans that could include potentially issuing a CLO, Bloomberg reported late last month. The line of credit helps create liquidity for the Apollo Debt Solutions vehicle in an environment where redemptions remain high, people familiar with the matter said at the time. ADS has also previously issued CLOs.
Apollo Debt Solutions also curbed redemptions in late March, telling shareholders it was capping withdrawals at 5% of outstanding shares after clients sought to redeem 11.2%.
BDC Issuance
Some investment firms use private credit CLOs as a way to finance their BDCs. According to a March note from Citigroup, BDCs tend to retain the riskiest pieces of these deals to maintain so-called skin in the game. The analysts put that exposure at about $12 billion, or roughly one-third of private credit CLOs’ junior capital.
“This reveals that BDCs play a far more significant role in the private credit CLO ecosystem than previously understood,” the analysts wrote.
By leveraging their existing loan portfolios through CLOs, BDCs can move beyond their standard 1:1 or possibly 2:1 debt-to-equity leverage ratios to boost overall yield.
“The CLO market and CLO investor base has been extremely supportive of the private credit story,” Blackstone’s Chant said.
Choppy Market
Despite the robust first-quarter deal tally, the market has nevertheless been choppy. Issuance of new private credit CLOs slowed in early March amid geopolitical concerns and fears about AI disruption, given software loans account for a sizable part.
And prices on the senior most tranches of some deals have widened by about 30 basis points since the beginning of that month amid the “continued headline pressure being exerted by redemption activity for many larger BDCs,” Deutsche Bank analysts wrote in a note.
Still, more deals are anticipated.
“CLOs in the private credit space may see an upsurgence because people think they want to take advantage of the volatility and this software overhang in the market may be a little bit overdone,” said Sean Solis, global head of the structured credit practice at Milbank LLP. “People are actually seeing green shoots and a little bit of opportunity to issue deals in the upcoming weeks.”
Deals
- Ares Management Corp. has provided a $160 million unitranche loan to back Nordic Capital’s acquisition of TradingHub
- Apollo Global Management Inc.’s $25 billion retail-focused private credit fund secured a $500 million credit line that it can use to snap up more loans at an opportune time
- A plant that liquifies and exports natural gas from the Gulf Coast of Texas has sold $2 billion of bonds in a true private placement
Fundraising
- Oaktree Capital Management-backed 17Capital LLP raised about $7.5 billion for its latest net-asset-value loan fund
- JPMorgan Chase & Co. is planning a new fund investing in private credit that will allow investors to redeem 7.5% a quarter — and, potentially, offer monthly withdrawals — as the $1.8 trillion market grapples with an unprecedented liquidity squeeze
- Blackstone Inc.’s flagship private credit fund has sold a new collateralized loan obligation deal, finding enough demand for the debt to boost its size by $50 million
Job Moves
- Ninety One Plc is planning to hire three new people for its emerging-markets private credit team this year, as it prepares to launch a new fund and meet growing investor demand for the asset class
- Apollo lost two executives involved in its efforts to originate large private loans and distribute them across Wall Street
- Ares applied for administrators to be appointed to Eagle Football Holdings Bidco Ltd, which owns shares in a number of football clubs including Olympique Lyonnais
- Nearly a quarter of the staff in the Securities and Exchange Commission’s division overseeing hedge funds, private credit firms, mutual funds and many investment products, left the agency last year
- Credit manager Sona Asset Management is hiring Suzutaro Kuroyanagi and Mark Tanase to lead its expansion effort in Japan
Written by: Rachel Graf and Ellen DiMauro — With assistance from Olivia Fishlow and Rene Ismail @Bloomberg
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