Carlyle to price €300 million; European CLOs on average underperform by 'wide margin'

By Cristal Cody

Tupelo, Miss., May 20 - New European collateralized loan obligation deals are expected in late May, including from Carlyle Group LP, which plans to sell a €300 million CLO, according to market sources.

KKR Asset Management LLC and GoldenTree Asset Management LP also are expected to bring new Euro CLOs over the next week or two, according to market sources.

The market, which reopened earlier this year with a €300.5 million deal from Cairn Capital Ltd., remains small compared to an expected $75 billion of U.S. issuance in 2013.

"Compared to historical peak levels during 2006 and 2007, the European new issue CLO market still has a long way to go," Credit Suisse Securities (USA) LLC analysts said in a report. "We now expect total issuance of $5 billion for the European CLO market in 2013."

European CLO equities mostly have underperformed U.S. CLOs by a "wide margin," the report said.

"However, we have also seen a wide range of performances among different managers," the analysts said. "Should the new-issue European CLO market come back, which we believe it will, investors need to apply more scrutiny on manager selection, based on their investing capabilities and past performances."

Since the European CLO market reopened this year and as funding costs come down to the point where the economics of new issuance looks viable again, the ability to source loans and retain risk will be key for CLO managers launching new European CLOs, Fitch Ratings said in a report on Monday.

In addition, Fitch noted that "CLO managers' increasing desire to include sterling assets - funded with either euro or sterling-denominated liabilities - in the new generation of European CLOs may introduce uncovered FX exposure."

CLO transactions with non-euro buckets that were structured before the financial crisis addressed foreign exchange risk by perfect asset swaps, macro hedges, out-of-the-money FX options and variable funding notes, the agency said.

"Today, many of these would need to be keenly priced to compete with other bank business lines, considering the dual challenges that European banks now face - raising capital (and reducing leverage) and obtaining competitive funding," Fitch said.

"This pricing may have a detrimental impact on the economics of a new CLO and may already be affecting the pricing of sterling assets in a market where most legacy CLOs are required to buy euro assets or hedge non-euro assets on purchase."

Carlyle to price six tranches

The offering from Carlyle Global Market Strategies Euro CLO 2013 includes €183 million of class A notes (/AAA/); €30 million of class B notes (/AA/); €17 million of class C notes (/A/); €13 million of class D notes (/BBB/); €21 million of class E notes (/BB/); and a €36 million equity tranche.

Barclays plc will arrange the deal.

The offering will be Carlyle Group's first European CLO deal since 2008. The Washington, D.C.-based global alternative asset manager priced two dollar-denominated offerings, a $623 million CLO and a $605 million CLO, earlier in the year.

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