CLO Weekly Wrap: US Investors Pour Into European CLO Market Despite Mounting Headwinds

The European CLO market is being bid up by international investors looking to reallocate capital away from the United States, according to speakers at the FT Live and AFME Global ABS conference in Barcelona this week.

Speaking on the CLO Manager Perspectives Panel, Conor Daly, head of European Credit at CIFC Asset Management, said that there was a particularly strong interest among U.S. investors in European CLO equity tranches.

“You have more U.S. interest in European equity than you’ve had in a long time,” Daly said. “There are probably less than 15 accounts in the U.S. doing European equity, but there was a time when it was five.”

Gauthier Reymondier, partner and head of European and structured credit strategies at Bain Capital, told attendees that he had spoken to investors who have sold U.S. Treasurys at the direction of their chief investment officers to reallocate and that big liability providers eyeing volatility and unpredictability in the United States are showing renewed interest in the market across the pond.

“The sizes of the market between the U.S. and Europe are four to one, so if you sell 10% of U.S. assets and reinvest that in Europe you’re increasing the European market by 40%,” Reymondier said. “There is some reallocation of U.S. flows into Europe, and you don’t need a lot for it to be very meaningful.”

European CLO market participants expect strong issuance volumes in the coming weeks based on constructive sentiment at the conference, although investors anticipate volatility later in the year.

“There will be a lot of deals, at least until July 9,” said a CLO tranche investor.

U.S. money flowing into Europe is supporting high levels of issuance, especially the mezzanine tranches.

“If you don’t have the U.S. guys in the mezz, you will struggle,” said a CLO manager.

CLO managers and investors said U.S. demand for European paper is driven by relative value and also by a more optimistic view on European fundamentals in the wake of trade tariffs. Panelists highlighted wider liability spreads on European CLO tranches working in combination with higher returns to equity and lower portfolio tail risk.

European investors said that they see value at the top of the stack and in the equity. CLO triple-As are lagging behind the tightening of most other asset classes and are thus set to come in further in the coming weeks. In the week prior to the conference, senior tranches were pricing at 133 bps-140 bps, about 15 bps wider than levels in late March before the tariff announcements and up to 25 bps wider than the tightest spreads achieved in February.

However, much of the current tightening is driven by technical factors. Buyers are awash with cash, several managers and investors told Octus, formerly Reorg, and repayments from older deals still play a role, albeit to a lesser extent than last year.

“I am getting a lot of money back from deals I bought in 2022 and 2023,” said one investor.

The need to deploy that money is fueling demand, but several investors and CLO managers conceded anonymously to unease about the extent to which spreads have tightened following the April volatility.

Mezzanine tranches are trading inside their pre-tariff levels, even though the outlook for portfolio fundamentals has worsened.

The 90-day pause on U.S. tariffs on imports from Europe is coming to an end on July 9. Europe is looking better to investors compared with the United States, and not because of a meaningful change in the outlook for its stagnating economies. The German government’s announcement of a multibillion-dollar infrastructure stimulus has increased the appeal of European assets to American investors, but its impact is far from certain, given Germany’s federal state system.

Several large downgrades this year, including the €1.4 billion CLO exposure tied to Cerba Healthcare last week, are weighing on triple-C buckets. Fitch increased its default prediction for European leveraged loans to 2.5% to 3.0% at the end of April, citing intensifying trade conflicts, but the intense CLO issuance is keeping loan prices near par.

“It is an environment where it is easy to make mistakes,” said an investor with a focus on mezzanine and equity.

Despite the uncertain outlook, new managers continue to push into the space. LGT Capital Partners announced the launch of its CLO platform shortly before the conference. Diameter, Elmwood and Muzinich are in the process of setting up European issuance programs to add to their existing U.S. CLO businesses.

As the recovery of leveraged buyout activity remains uncertain, competition over loans is expected to intensify further.

The pricing of the first reinvesting European middle-market CLO by Ares Management via BNP Paribas shortly before the conference rekindled discussions of the potential for this market to evolve in Europe. The deal followed a static middle-market CLO issued by Barings last year.

Neither of the two transactions was broadly syndicated to investors. Mass Mutual took the majority of Barings’ debt tranches. Ares’ deal, a sterling transaction, is said to have been structured in partnership with a U.K. insurer.
 

In the primary market, new issue CLO volume dropped to $3.2 billion globally this week, down from $6 billion the week prior, as the market shifted to favor refi, reset and reissuance, which totaled $6.3 billion on the week. All of the primary activity occurred in the United States, while the European market paused amid the Barcelona conference.

Among the new deals this week was a first-time issuer, CTM Asset Management, which priced its debut transaction, CTM CLO 2025-1, via Morgan Stanley. The firm became the fifth debut issuer in the United States this year, following Garnet Credit Management, Kohlberg, Macquarie, Polen and Symetra.

Liability spreads continued to tighten at the top of the capital structure, with GoldenTree’s reset of its GLM US CLO 17 deal via Scotiabank coming in 1 bps inside the previous tights of the market.
 

With many market participants in Barcelona, secondary trading was limited, and the volume of lists of bids wanted in competition, or BWICs, fell to the lowest level for several months. Just 43 CLO lists were offered, according to Solve data, featuring 185 bonds totaling $674 million and €96 million.

Triple-A names featured heavily, making up almost all of the European total at €86 million and a large portion of the U.S. total at $275 million. A sizable amount of U.S. equity was offered at $152 million, mostly consisting of the $126 million equity piece of recently refinanced Octagon 64, though it failed to trade, having had price talk in the mid-to-high 20s.

European warehouse activity picked up again, with Carlyle, CVC, Napier Park and Palmer Square establishing CLO vehicles, according to the Irish Companies Registration Office. Octus records show a total of 131 vehicles which have yet to result in priced deals.