CLO industry expert, Kylie Duff, Head of US CLOs at Morgan Stanley, shares views on private credit and US CLO activity
Bringing Us CLOser
Launch of our new regular diversity, equity and inclusion feature, in collaboration with Out Investors
Private Credit CLOs
Your Maples Group global CLO team provides Cayman Islands, Irish and Jersey legal advice and listing services, together with CLO issuer / co-issuer administration, regulatory and fiduciary services in the Cayman Islands, Delaware, Dublin, Jersey, London, Luxembourg and the Netherlands.
This edition of The CLOser includes
What’s Inside
The Maples Group is delighted to present our June 2024 edition of The CLOser.
In addition to our regular US and European market reviews and listings updates:
• Our Bringing You CLOser external article comes courtesy of Kylie Duff, Head of US CLOs at Morgan Stanley
• We present an article on private credit CLOs
• We are thrilled to launch our new 'Bringing Us CLOser' feature, to shine a spotlight on diversity, equity and inclusion in the CLO industry. This inaugural article comes in the form of a Q&A with Alberto Padilla and Nick Klimchuck, Co-Chairs at Out Investors
• And finally, we feature a few members of our global CLO team and introduce Yann Hilpert, a highly-experienced finance lawyer that recently joined the Maples Group as a Partner in our Luxembourg office
We very much hope you enjoy this edition and find the content engaging and informative.
Best wishes from the Maples Group CLO Team.
US CLO Market Review
Introduction
In this US CLO market review, we provide some observations and analysis in respect of activity YTD, with a focus on transactions on which the Maples Group was engaged. The key developments so far this year have been the removal of the Cayman Islands from the EU’s AML List, on 7 February 2024, and the changed circumstances and conditions that have presented opportunity for CLO refinancings and resets to proceed.
De-Listing of the Cayman Islands from the EU AML List
In our October 2023 edition of The CLOser, we provided a timeline and overview of the listing and de-listing process. For further information, please read our prior edition¹ .
Our immediate observation postdelisting on 7 February 2024 is that there has been a switch back to incorporation of Cayman Islands SPVs for US warehouses and CLOs. This is evident in the data presented at Figure 1. With regards to CLO closings, there is, of course, a legacy of Jersey SPVs and we continue to see some deals closing with a Jersey issuer although that number is decreasing and some migrations back to the Cayman Islands are occurring. For more information, please see Figure 5 and related commentary.
SPV Incorporations by Jurisdiction
Figure 1: Impacts of Listing / De-listing - SPV Incorporations by Jurisdiction
Figure 2: Impacts of Listing / De-listing – CLO Closings by Jurisdiction
Cayman Islands Jersey % Cayman
In terms of issuer SPV jurisdiction, in October 2023, we reported that across the US CLO market, Cayman Islands and Jersey SPVs, collectively, were employed in around 82% of the priced deals, with quite notably only around 6% opting for Bermuda SPVs. As observed from Figure 3, this position has begun to shift, with fewer US CLOs employing Jersey SPVs. Comparing the data YTD for closed US CLOs to the same period for 2023, we can see an 11% reduction in Jersey SPV issuers and a commensurate 11% increase in Cayman Islands SPV issuers. Interestingly, deals involving a US issuer only are up slightly and the use of Bermuda SPVs is now negligible, at only 4%.
Jurisdictional split in terms of closed CLOs on which the Maples Group was engaged is reflected in Figure 4. Not surprisingly, considering our market-leading 60%+ engagement on US CLOs with Jersey SPVs, the split we have witnessed so far is quite different to the US CLO market overall, at around 51% Jersey SPV issuers and 49% Cayman Islands SPV issuers. However, based on Figure 3 and some of the data we present later in this review, our expectation is that such jurisdictional split will begin to shift considerably over coming weeks and months, as the market largely returns to the pre-EU AML listing position, in which the Cayman Islands was the traditional jurisdiction of choice.
Figure 3: SPV Jurisdiction – Across Entire US CLO Market
Issuer Jurisdiction US CLO Market - 2022/2023 versus 2024
Figure 5 aims to illustrate how we have seen the trend in Cayman Islands-to-Jersey migrations diminish over time (while the Cayman Islands has been on the EU AML list and SPVs have been incorporated in alternative jurisdictions from the outset) and then the reverse trend of Jersey-toCayman Islands migrations, post-delisting from the EU AML list. The blue dots in Figure 5 indicate a CLO closing with a Cayman Islands issuer and the orange dots indicate a CLO closing with the Jersey issuer; the arrows indicate the direction of a migration, if any.
Our Jersey team colleagues had the following comments and observations regarding their experience of working with the Cayman Islands and Delaware-based CLO team members:
"In recent months, our Jersey team has reflected on the role it has played in supporting our clients, various onshore intermediaries and Cayman Islands colleagues in connection with US CLO transactions over the last couple of years. As you will know, from the start of 2022 Jersey found favour as the preferred alternative jurisdiction for securitisation and other securities issuance transactions (including US CLOs) with EU investors.
The use of Jersey vehicles in a large number of US CLOs has had a significant and positive impact on Jersey which is a jurisdiction with a longstanding history and involvement in structured debt issuance transactions. Despite some differences in authorising use of Jersey SPVs as issuers (when compared to, for example, the Cayman Islands and Delaware), we are pleased that the vast majority of our clients have experienced largely ‘like for like’ outcomes when opting to use Jersey issuers in US CLO transactions.
The Jersey/US CLO experience has reminded onshore intermediaries in the US and UK and our manager/sponsor clients about Jersey’s excellent reputation as a jurisdiction outside of the EU for facilitating structured debt issuance. What our teams have experienced as a result of this is a renewed interest in the use of Jersey issuers in the following applications:
• significant risk transfer (SRT) transactions;
• repackaged note programme issuance; and
• medium term note (MTN) issuance programmes.
The high volume of US CLO transactions with Jersey issuers that we have acted on since 2022 has also allowed us to work continuously and closely with both the Jersey financial services regulator (JFSC) and companies registry teams. This has strengthened the excellent working relationship we enjoy with these key regulatory and local authorities in Jersey.
While we have seen some migrations from Jersey to the Cayman Islands, CLOs that have closed with a Jersey SPV are not being redomiciled; whereas some, but not necessarily all, Jersey SPVs with a warehouse 'open' are being migrated to the Cayman Islands at or prior to closing of the CLO.
As a reminder, the use of Jersey SPVs in structured debt issuance dates back to the mid 1990s. This has been in a wide variety of applications including short dated issuers such as asset backed commercial paper (ABCP) and SIV entities through to term ABS, high yield bond issuance, securitisation and significant risk transfer (SRT) structures"
For further information about the use of Jersey entities in structured debt and securities issuance transactions, please approach your usual Maples Group contact who can connect you with a member of our global Finance team with Jersey expertise.
Figure 4: Closed CLOs with the Maples Group – Issuer Jurisdiction
Figure 5: Closed CLOs with the Maples Group – Issuer Jurisdiction & Migrations
In terms of managers, the Maples Group has acted for over 40 that have issued thus far this year and, of those, 70% have issued once. See Figure 6 for the distribution.
Closed CLOs - Managers
Managers
Due to the more favourable conditions in 2024, including re-established US bank demand for AAAs, activity has been up substantially in connection with new issuance as compared to 2023. Particularly notable for the Maples Group is the uptick in SPV incorporations, indicative of an optimistic sentiment, but new warehouses and CLO closings are also higher in volume. New issuance activity for the Maples Group is reflected in Figure 7. By way of summary, incorporations are up 144%, new warehouses are up 76% and CLO closings are up 44%.
Figure 6: Closed CLOs with the Maples Group – Managers
Figure 7: Closed CLOs with the Maples Group – Managers
Here are one or two additional trends and observations based on closed CLOs in which the Maples Group was engaged:
• Deal Size
During the course of this year, deal size has tended to increase, with average deal size by May / June reaching ~USD$500 million +. See Figure 8.
• Listings
Around 75% of CLOs that have closed YTD with the Maples Group were not listed – see Figure 9. Of those listed, the Cayman Islands Stock Exchange ("CSX") came out on top. For a more detailed listings review, however, please see our Listings Update on page 14.
• Open Warehouses
The number of open warehouses is in a constant state of flux as deals close and new warehouses open. We have, however, sought to give an indication as to the apparent small 'growth' in open warehouses in Figure 10. In October 2023, we reported having around 86 open warehouses. The figure is now in excess of 100 and, at the time of writing, stood at 108. This is a 25% increase from October 2023 and we can see from Figure 10 that broadly the trend is upwards from January 2024.
• Warehouses Duration – Closed CLOs
In respect of closed CLOs, the Maples Group tracks the time each deal spends in warehouse, and we have presented a snapshot of such data for the period November 2023 to June 2024 in Figure 11. While there is variability, warehouse periods have trended shorter and are currently in the region of six to eight months. This is shorter than the warehouse periods observed on average in October 2023, which were in the region of nine months, likely reflective of the better market conditions.
• Price-to-Close Periods
In more opportunistic and volatile periods, we tend to see the emergence of print-and-sprint deals and shorter priceto-close periods. Consistent with the better and more stable market conditions we have witnessed price-to-close periods overall trending slightly longer in the first half of this year. The data in this regard is presented in Figure 12.
$550,000,000
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Number of Deals in Warehouse
CSX
Stock Exchange Listings
Figure 8: Closed CLOs with the Maples Group – Deal Size in USD
Figure 10: 'Open' Warehouse with the Maples Group
Figure 9: Closed CLOs with the Maples Group – Stock Exchange Listings
Riding the Refi / Reset Wave
At the DealCatalyst / LSTA Annual CLO Industry Conference at the end of April 2024, Moody's reported on the very substantial proportion (70%+) of their rated deals that were exiting their non-call periods and would be eligible to be refinanced or reset. The Maples Group's experience is entirely consistent with the large pool of eligible deals coupled with favourable conditions and good demand. At the time of writing, in 2024, the Maples Group had already been instructed on around 125 separate refinancings or resets, towards half of which had proceeded to a successful closing. See Figure 13 for the distribution of instructions verses closed refi / resets YTD 2024.
Our month-by-month data is presented in Figure 14, with the distribution of 'vintages' of deal depicted, including the overall trend in total number of instructions received. Our busiest months have been March and May.
Figure 11: Closed CLOs with the Maples Group – Warehouse Duration
Figure 12: Closed CLOs with the Maples Group – Priced Periods
Figure 13: Refi / Reset with the Maples Group – Proportion Closed
Figure 14: Refi / Reset with the Maples Group – Monthly Instructions & 'Vintage'
The vintage of deal is further elaborated upon and summarised in Figure 15, which clearly indicates that the terms and unique features of deals closed in the 2020-2021 pandemic period (e.g. with short non-call periods) have been particularly ripe for refinancings and resets, with 2018 deals following closely behind.
Although some commentators have indicated global macroeconomic conditions and future uncertainties may favour the 'resetting' of deals over a refinancing, so far this year we have seen a propensity towards refinancings. See Figure 16.
2024 Market Conditions and Outlook
This year began with a relatively modest start but activity quickly picked-up pace resulting in what looks to be a very strong H1, with the prevailing trends being the large volume of refi and reset activity and interest in private credit / middle market deals – more on that later in our 'Bringing You CLOser' Q&A piece with Morgan Stanley and our Private Credit article – see pages 16-19.
Looking ahead to the rest of the year, while there are potential legal and regulatory headwinds on the US side and possible higher-for-longer interest rates, these factors have not been felt markedly and conditions otherwise have been favourable and expect to remain so with predictions solid for a strong year that is anticipated to be largely defined by –and focused on – refinancings and resets and private credit CLOs. The Maples Group global CLO team is excited to see how the remainder of the year progresses and looks forward to providing market-leading support and advice through these times of heightened activity.
Figure 15: Refi / Reset with the Maples Group – Distribution of 'Vintages'
Figure 16: Refi / Reset with the Maples Group – Trends in Refi v Reset
European CLO Market Review
The 2024 Market - Thus Far and the Year Ahead
Though 2023 started off slow in the European CLO market, the second half of 2023 saw an increase in activity with many CLO managers deciding to incorporate new entities and / or open warehouses in anticipation of a busy 2024.
As at the end of April, it was clear that 2024 was already building up to be a busy year in the European CLO space. There had been a significant increase in: (a) the number of CLO entities being incorporated; (b) CLO deals pricing; and (c) CLO refis closing.
We have conducted an analysis of CLO entities that had been incorporated from 1 January 2024 until the middle of March 2024 ("Review Period"). This analysis echoes the sentiments of other public data sources and, combined with the number of warehouses opened in Q4 2023 still active, points to a strong second half of the year. In the Review Period, 18 SPVs were incorporated with 10 of these SPVs opening their warehouses within weeks of incorporation.
The first quarter of 2024 recorded €10.9 billion of new issuances with March alone contributing €5.42 billion to this figure. On the CLO reset and refinancing side, there was €3.3 billion in reset issuances and €0.7 billion in refinancing activity during the first quarter of 2024.
At deal-level, there has been a return of the Class A Loan Agreement to the funding structures of European CLOs. Furthermore, we have noted that multiple Class A Loans are being put in place on certain deals showing the appetite of multiple banks to lend into CLO structures. We are also seeing third-party equity investors, who will ultimately participate in the CLO mezzanine or equity, invest directly into the warehouse prior to the CLO phase (on or around CLO pricing).
CLO Funds and Risk Retention Vehicles
In line with the uptick in underlying warehouse and CLO activity, we continue to establish new forms of CLO funds (investing in CLO paper) for sophisticated investors, whether in Ireland, Luxembourg or Jersey. In addition, we are seeing initial interest in whether the EU's new ELTIF 2.0 long-term investments retail fund product can be used to invest in CLOs (as part of its primary investment strategy, as well as part of its liquidity management tool and permissible liquid bucket). We are also actively exploring with several clients whether an EU CLO ETF can be established in Ireland or Luxembourg (being the main EU hubs for UCITS). All of this activity will hopefully increase the CLO investor universe and overall demand for CLO paper.
On the risk retention side, we continue to see both longestablished and newer collateral manager franchises raise new fund structures in order to secure the equity to issue new CLOs. Typically, repeat funds utilise existing structures and particularly where existing investors are coming into the new fund but we are seeing new structures and terms being considered also. Often, these structures combine several of our offices working in tandem particularly across the Cayman Islands, Delaware, Ireland, Jersey and the UK, from legal services to board directorships satisfying Risk Retention requirements under the relevant EU and US Securitisation Regulations, depending on the geographic focus and investor preferences.
EU Regulatory and Tax Developments
EU Banking Directive – CRD VI
In late April 2024, the EU passed the latest iteration of the EU's banking regulation, known as CRD VI. While the main legislative purpose was to implement the Basel III standards (including some viewed optimistically generally for securitisation), of potential interest also is the introduction of a third-country banking branch regime.
From early 2026, this will impact non-EU banks who lend to EU borrowers other than inter-bank and intra-group, as such activity will trigger a requirement to establish a local credit institution branch in each EU member state (without the benefit of being able to passport throughout the EU) absent lending through a fully-licenced EU credit institution or being able to rely on limited exemptions.
While there is a significant number of issues to be worked out, one immediate point to note is that while the regime is not effective until 2026 it is already becoming a structuring issue across several credit markets. This is primarily due to some uncertainty over the scope of the grandfathering regime (albeit in the CLO context the shorter duration of warehouse facilities means they are not at the forefront of these discussions).
It is likely the markets will adapt in various ways, one of which may be to increase the attraction of CLO paper and securitised products generally as a means to gain exposure to EU credit markets.
Pillar Two – Tax
Ireland has implemented the EU and OECD Global Minimum Tax rules (also known as "Pillar Two") with effect for accounting periods beginning from 31 December 2023.
The Pillar Two rules aim to ensure that certain multinational groups pay an effective rate of tax of at least 15% in each jurisdiction where they operate. This can impose new 'top up taxes' on companies coming within its scope which can increase the tax payable in Ireland.
The Pillar Two rules will be relevant for Irish CLO SPVs if the SPVs are within a 'group' for the purposes of the rules.
The first key question is whether the CLO SPV is or would be included in consolidated financial statements of a parent entity in accordance with acceptable accounting standards. An entity will be treated as included within the financial statements for Pillar Two purposes even if it is excluded solely based on its small size, i.e. materiality, or if it is held for sale.
The second key question is whether the group (including any excluded entities such as investment funds and investment entities) has revenues of over EUR750 million in two of the previous four years.
Where a CLO SPV is included in consolidated financial statements and the revenue threshold is met, the Pillar Two rules broadly require that the income of the group is taxed at a minimum effective tax rate of 15% on a jurisdictional basis. As such, it may be necessary to determine whether the CLO SPV is actually paying an effective tax rate of 15%.
The Pillar Two rules aim to ensure that certain multinational groups pay an effective rate of tax of at least 15% in each jurisdiction where they operate.
It is also worth noting that, in accordance with international accounting standards, IAS 12 Income Taxes, entities have an audit requirement to disclose their Pillar Two position and is also raised by Irish auditors in their statutory audit letters.
There is still some uncertainty as to how the Pillar Two rules will be interpreted in Ireland (and globally) but the point still needs to be dealt with from a documentary and opinion perspective for all new warehouse and CLO transactions in 2024. A historic analysis will also be required for existing CLO SPVs.
Joe O'Neill +353 1 619 2169 joe.o'neill@maples.com
Julian Dunphy, Jarlath Canning and Michael Drew from the Maples Group fiduciary services team in Ireland had the following comments on market activity year-to-date:
In Ireland, the entity formation landscape has been particularly strong, driven by activity in the CLO space. According to the latest Atlantic Star data, the number of active SPVs in Ireland rose by 3.3% in February to 4165, which was up 0.5% on the previous month and 3.3% higher than February 2023. CLOs also accounted for 17.3% of all active SPVs. This buoyancy in the Irish market, which added 133 SPVs over a 12-month period, came on top of a similarly strong performance in February 2023 when annual growth SPV exceeded 4%. The positive start to 2024 also built on the momentum of the strong final quarter of 2023 after the Federal Reserve ended its monetary tightening phase. After a difficult period with respect to the macro backdrop, the level of incorporations in Ireland has clearly been positive. Many of the deals incorporated during that period were incorporated or warehoused last year and closed in the first quarter of 2024.
Some 41% of Irish SPVs have debt listed on exchanges, with Euronext Dublin Global Exchange Market accounting for 46.9% of all listed SPVs. The Vienna Stock Exchange has also increased in popularity for Irish SPVs as the next most popular listing domicile as entities attempt to insulate themselves from the potential impact of the EU Anti-Tax Avoidance Directive III measures by listing their transferable securities on regulated markets within the EU.
With expectations that 2024 will likely ramp up further, with a number of deals due for refi/reset, albeit not on the scale of two or three years ago, the Maples Group’s fiduciary team is well placed to respond following the recent expansion of our team in Dublin. The Maples team continues to lead the Irish market as both Corporate Service Provider and Company Secretary, with the firm engaged as CSP on 18.6% of active Irish SPVs and as company secretary on 20.7% of SPVs.
Listings Update
Cayman Islands
Although this will come as a surprise to no one in the trenches of the US CLO market, and as noted in the US market review, refis and resets have returned. With their comeback, we have seen a noticeable increase in listings of CLOs on the CSX. In 2024, the CSX has had 41 CLO listings to date compared to eight CLOs listed for the same period last year. In fact, CLO CSX listings during the first quarter of 2024 have already surpassed the total number of CLO CSX listings for all of last year, as only 32 US CLOs listed on the CSX during 2023. Of the 41 CLOs listed on the CSX to date this year, the Maples Group has listed more than half (54%).
The seedlings of the re-emergence of the refinancing market started to sprout in the second half of last year: in August 2023, we saw the first CLO refi price in 15 months; and through the last quarter of the year, there was a marked increase in deals called for refinancing. By the end of 2023, six refinancings or resets had listed on the CSX, so that by year-end, 81% of the CLO CSX listings were new issuance CLOs, and 19% were refinancings or resets.
The refinancing trend has continued with full force into 2024, and many of the refinancing transactions have sought a listing on the CSX. Thus far in 2024, 51% of the CLO CSX listings have been refinancings. During the same period in 2023, there were no refinancing or reset CSX listings; through to the end of September 2023, 100% of the CLO listings on the CSX were new issuance CLOs.
Notably, the European Commission removed the Cayman Islands from its list of 'high-risk third countries' identified as having strategic deficiencies in their anti-money laundering / counter-terrorist financing regimes ("EU AML List") with effect from 7 February 2024 and since then, we have seen a strong preference in the market to return to the Cayman Islands as the jurisdiction of choice for the incorporation of US CLO issuers. However, given that the Cayman Islands spent nearly two years on the EU AML List, we are still seeing a jurisdictional split in the incorporation domicile of US CLO issuers electing to list on the CSX.
Of the 41 CLO listings in 2024 to date, 29 or 71% were by Cayman Islands issuers with a Delaware co-issuer; five or 12% were by Jersey issuers with a Delaware co-issuer; and five or 12% were by Bermudian issuers with a Delaware co-issuer. By contrast, in 2023, 16 or 50% were by Cayman Islands issuers with a Delaware co-issuer; 12 or 38% were by Jersey issuers with a Delaware co-issuer; and two or 6% were by Bermudian issuers with a Delaware co-issuer. The marked increase in Cayman Islands domiciled CLO issuers listing on the CSX highlights the fact while the market firmly settled upon Jersey as the primary alternative jurisdiction for the CLO issuer when the Cayman Islands was not available, with the delisting of the Cayman Islands from the EU AML List, the market is returning to the Cayman Islands.
Nonetheless, middle market CLO issuers still appear to favour Delaware-incorporated issuer vehicles; and two such issuers have listed on the CSX this year (one new issue and one refinancing), accounting for 6% of the new CLO listings. This is a trend which we expect to see continue for certain middle market managers, despite the delisting of the Cayman Islands from the EU AML List.
The Maples Group listed 54% of all the CSX-listed CLOs during this period, including 52% of the Cayman Islands issuers, 100% of the Jersey issuers and 100% of the Delaware middle market issuer listed on the CSX.
A listing of CLO notes is driven by the investors and the CSX remains a popular choice for investors who require a listing on a recognised stock exchange, due primarily to its efficiency and competitive pricing. However, it is clear that in the current market, many investors do not require a listing of their CLO notes – and our current data in this regard can be found in Figure 9 - the US Market Review. At one time, it was the standard to have every US CLO issuer list every tranche of its CLO notes, from the Triple-As through to the subordinated notes. It is now far more common to see the listing of a single tranche of notes, or a couple of the senior secured tranches. The CLO listings on the CSX thus far this year reflect this trend. Of the 41 CLOs listed on the CSX to date, a staggering 61% listed only a single class of CLO notes, and a further 15% listed only two or three classes.
March 2024 was the most active month for CLO CSX listings with 19 new CLO listings. However, February saw nine CLO listings, and in April, there were 10 CLO listings. The high number of listings during these months is not surprising given the level of refinancing activity in the market at that time. Listings of CLOs on the CSX generally keep pace with market conditions in the CLO space. If the refinancings and resets continue apace through 2024, we do expect to see a significant number of CLO issuers listed on the CSX this year.
For further details, please contact:
Amanda Lazier
+1 345 814 5570
amanda.lazier@maples.com
Bringing You CLOser
Our seventh 'Bringing you CLOser' inside view from recognised CLO industry participants and experts. In this Q&A with James Reeve, the Head of US CLOs at Morgan Stanley, Kylie Duff, shares her thoughts regarding the US CLO market yearto-date and beyond, with a particular focus on private credit.
From an arranger / lender perspective, what are your main observations regarding 2024 so far in terms of pricing, terms, strategies or otherwise?
From my perspective, the most notable change this year is readily visible to market participants – simply the cost of financing. Led in large part by the tradable markets, ABL/direct lender finance, syndicated and private credit CLOs and unsecured bonds have all become dramatically more cost-effective means of financing since the start of the year. We have seen the cost of senior financing tighten by anywhere from 30-60bps. Away from liquid/tradable markets, that delta is materially more pronounced.
From a strategy perspective, we hear most about effectively and thoughtfully sourcing risk. It is commentary offered by both originators of loan risk and consumers on the securities side. As it relates to loan sourcing, asset managers are employing a “dual-track” in their financing proposals. For larger firms, it’s a way to maximize the likelihood that they have access to a credit they like, whether that borrower elects to finance privately or pursue a syndicated approach. It is further indicative of an era in credit which reflects more of a spectrum than a collective of separate silos (distressed vs. performing, high yield vs. investment grade, private vs. public). We see increasingly fewer firms who pursue only one of those strategies and instead, staff for multiple strategies as they look to maximize the opportunity set.
Kylie Duff, Head of US CLOs, Morgan Stanley
What challenges and opportunities are being created by the apparent 'higher-for-longer' interest rate environment? How is this impacting your current and future strategies and focus?
Broadly speaking, it’s important to consider that rates have remained higher-for-longer because of the resilience of the underlying economy. Though we appear to be at the end of a tightening, this construct has been hugely supportive for end investors in floating rate products – we are at the intersection of confidence in credit, the perception of a protracted but manageable default cycle and elevated available returns profiles. The effect has been compounding: risk premia has reduced, leading to a wave of refinancing, creating cash that needs to be redeployed.
Ultimately for us, the priority at present is to lean into the opportunity with clients and help them optimize across financing strategies – whether it’s an ABL, an unsecured issuance, a CLO refinancing. This effort is manifesting on the capital markets side in an increase in CLO supply of +200% year over year and a 40-50% decrease in the 2025-2026 asset maturity wall. In helping clients tackle these issues, it frees up capital and bandwidth for them to pursue longer term objectives.
That being said, there is still a segment of the market that remains exposed. For those borrowers with fewer avenues to access capital,
the sponsor, and their willingness to come to the table is paramount. I’d also point out that despite nearly US$14bn of private deals being refinanced in the syndicated markets, almost US$7bn is going the other way – perhaps an indication that even though the tradable credit markets are open, they can also be discerning.
It has been reported that assetbacked lending is the "next frontier" of private credit – do you agree with that statement and why?
We generally agree that asset-backed lending is the “next frontier” of private credit. The Total Addressable Market is much larger at an estimated ~20-40 trillion, versus ~5 trillion in traditional direct leveraged lending, and spans a range of different asset classes from consumer loans to commercial and residential real estate to operating assets across the digital infrastructure ecosystem.
From a demand perspective, private credit firms are increasingly tapping into fundraising channels across insurance and retirement/wealth assets that are well suited for assetbased finance due to its duration and yield characteristics. Investor return targets range from investment grade to equity-like, and asset-based finance can be tailored to meet a variety of needs driven by the ability to structure and tranche underlying cash flows.
From a supply perspective, banks have pulled back from many loan origination channels due to capital
and liquidity scarcity in the face of increasing regulation and more restrictive monetary policy. This has opened the competitive landscape to non-bank lenders in what were traditionally core bank products (e.g. consumer and residential mortgage loans, commercial mortgage loans, etc.). Additionally, secular growth trends in digital infrastructure, renewable energy, and transportation require new and different pools of capital to support capital expenditure needs. Finally, the flexibility of private capital, which is less constrained by market liquidity, ratings, and other public market needs, has accelerated the expansion of securitization to new asset classes including music royalties, sports and entertainment media rights, etc.
The private debt market has grown more than six-fold since the credit crisis of 2007-2008. Today, the private credit market stands around US$1.5 trillion, do you foresee this type of growth continuing?
Market participants offer varied views on the source of this demand – some have suggested retail appetite will be the driver, others are looking toward sovereign wealth and insurance, others still anticipate expansion regionally within non-Japan Asia. The “how” is debatable but there is consensus around the direction of travel: the bias is bigger.
Is private credit a valuable partner to the BSL industry (by expanding the market) or does it pose a threat / competition?
There is absolutely room for private and syndicated credit to comfortably co-exist, and that’s not limited to CLOs. Broadly speaking, the credit world has evolved, and many asset managers now offer a full suite of services that cover the spectrum of the space. Certainly, we see asset managers lead with a subset of core competencies, but a diversified firm that has the ability to leverage intellectual capital across strategies has become a very attractive value proposition. For a potential client with pockets of capital for multiple credit sleeves, it’s a way for them to invest in a firm they like, without the need to diligence a multitude of new managers. Not only does this model allow asset managers to effectively allocate capital in a dynamic environment, but this construct has become a marketing and retention tool for existing and prospective investors.
Likewise, some borrowers will approach the financing process looking to “do more with fewer” as they scale. In a market that seeks to create efficiencies, the ability for a bank to offer diversified financing solutions that completement what could be provided privately is very beneficial.
How do you see the current investor landscape and are there any significant changes on the horizon?
The composition of the buyer base has evolved year over year, both in terms of its composition and its activity.
Domestic insurance and money manager activity have been key drivers of CLO volumes this year for Morgan Stanley. In years past, the bank community (both in the US and internationally) have been the largest AAA buyers – however, while we do see banks buying to maintain exposure and even some net adding, on the whole, we saw banks reducing holdings to the tune of approximately US$6bn quarter over quarter.
The CLO ETF is not new but in the last year, it has experienced parabolic growth. At more than US$11bn, it has increased 5x since last year. In 2020, it was almost
zero. This is a notable new entrant, and we tend to see this segment of the market more active in secondary trading. We will look to see continued growth amongst ETFs both in terms of their scale and in terms of mandate flexibility.
The other observable trend is the increase in what we are calling the “crossover” buyer base. This is simply a reference to the investors that can and are participating across products in corporate finance – this includes (but is not limited to) BSL and Private Credit CLOs, warehouse lending, BDC financing and Asset-Backed finance. This flexibility on the part of investor mandates can impact volumes, pricing and the variety of ways that Morgan Stanley can engage.
What key headwinds do you expect in H2 2024?
The Fed rate cut is the most discussed topic: “how much and when". The market has nimbly adjusted its assumptions on the heels of Fed meetings and continued to march higher/tighter for the entirety of 2024. It’s a known unknown for the markets. From a macro standpoint, the Morgan Stanley Global Economists are anticipating 3 rate cuts beginning in September, followed by 4 cuts in 1H next year, moderated inflation and a strong dollar. Our base case is that the Fed will thread the needle for a soft landing. All of this lends itself to a constructive environment for credit.
In addition to the focus on the Fed, the market is contending with national elections across the globe, including one of our own in the United States. An analysis by US Bank strategists outlined that the financial markets responded more to economic and inflationary factors than to election outcomes. Where we could see a more acute impact is at the sector level, depending on which party remains/comes into power.
Drilling down to CLOs: the biggest headwind to sustaining this level of activity is origination/asset aggregation - it’s finding the right assets at the right prices. With financing available, we expect that this is what will govern new transactions volumes.
Do you have any predictions on US CLO issuance or trends through the rest of 2024 and perhaps into 2025?
Historically, a rally has followed the final hike in a tightening cycle – in keeping with tradition, we are expecting some pockets of credit to tighten to levels not seen since preFinancial Crisis. This is being driven by increased insurance demand, asset rotation out of money market funds and continued ETF inflows. Our expectations are that these trends will carry through the remainder of the year and for some, into 2025.
These tailwinds could certainly be supportive for CLO issuance to the extent the asset supply keeps pace. For projections around CLO issuance, we are expecting US$168bn of new issue, which would be the second highest in history and another US$120bn of refi/reset activity. We continue to be constructive on equity, a position we have maintained since the beginning of the year, in accordance with our call on credit.
Contributions by Richard Myers
Bringing Us CLOser
The Maples Group is committed to maintaining an inclusive and diverse culture across our offices with policies and programmes that facilitate positive experiences for our colleagues and clients. Ultimately, we want our people to know they are supported, that they are respected and that they are encouraged to be their authentic selves in the workplace. Fostering this culture goes to the heart of our Group's core values and, we hope, this approach will transmit positively into the communities in which we, as an organisation, operate globally.
In this edition, we are excited to launch our new regular diversity, equity and inclusion feature 'Bringing Us CLOser', a platform to bring visibility to the diversity of our teams and yours, as we look to collaborate with our readers and their businesses on articles that shine a spotlight on diversity, equity and inclusion in the CLO industry and throughout all CLO industry participants. As this edition of The CLOser is being published in Pride Month, our inaugural 'Bringing Us CLOser' article is a Q&A piece with Alberto Padilla and Nick Klimchuk, Co-Chairs at Out Investors, an organisation that is dedicated to supporting LGBT+ professionals in the financial services industry.
Could you please tell us about your organization, why it was established, and its aims and objectives?
Out Investors was established with the mission to make the direct investing industry more welcoming for LGBT+ professionals. We recognised that while there are informal LGBT+ networks in the broader financial services industry, there was a need for a structured approach that is directly supported by investment firms. Our aim is to connect LGBT+ investment professionals globally and provide them with a supportive community where they can be themselves and connect with like-minded peers. We also aim to provide resources and guidance to investment firms on how to best support their LGBT+ employees. We achieve our mission through activities including networking events, speaker series, mentorship programs, and advocating for the inclusion and support of LGBT+ professionals in the industry.
What issues or challenges do your members tend to identify and seek to address through membership of your global organization?
Our members often identify issues such as a lack of visibility and representation of LGBT+ professionals in the industry, as well as a lack of support, community and inclusive policies within their workplaces. Through membership in Out Investors, they seek to address these challenges by connecting with a network of similar professionals who understand their experiences and can provide support and mentorship. They also seek to create a more inclusive and welcoming industry by advocating for policies and practices that support the inclusion and advancement of LGBT+ professionals.
Many of your members are active in the US and European CLO market. What role, if any, do you think CLO managers and investors can play in helping to progress diversity, equity, and inclusion in the CLO industry?
CLO managers and investors have a significant role to play in advancing diversity, equity, and inclusion in their space. They can prioritise diversity in their hiring practices, actively seeking out and recruiting diverse talent, including LGBT+ professionals. By fostering a culture of inclusion within their organisations, they can create a safe and supportive work environment where LGBT+ professionals feel valued and have equal opportunities for career advancement. Additionally, CLO managers and investors can use their influence to advocate for diversity and inclusion. Their actions can contribute to creating a more vibrant and inclusive CLO market that benefits both diverse talent and the industry as a whole.
Given the establishment of 'chapters' in various different locations, how does your global organization take into consideration regional perspectives and cultures in formulating its overall strategies and approach?
Our global organisation takes regional perspectives and cultures into consideration by establishing local chapters in major financial hubs and partnering with investment organisations in each region. Today that includes New York, London, San Francisco, Toronto, Los Angeles, Paris and the DACH region (Germany, Austria and Switzerland). These local chapters are responsible for fostering community, holding networking events, and facilitating mentorship within their specific regions. By operating through local chapters, we are able to tailor our strategies and approach to the specific needs and cultural nuances of each region. This ensures that our members feel a sense of belonging and can connect with others who understand their local context. Additionally, our global organization provides guidance and resources to the local chapters to ensure consistency in our overall mission and objectives while allowing for flexibility in implementation.
Looking ahead, over the next 5 years, what do you think should be the key areas of focus for LGBTQI+ and allies such as Out Investors and why?
Over the next 5 years, key areas of focus should include continued advocacy for inclusive policies and practices within the direct investing industry. This includes promoting diversity and inclusion at all levels of organizations, from entry-level positions to leadership roles. It is important to ensure that LGBT+ professionals have equal opportunities for career advancement and are represented in decisionmaking positions. Additionally, there should be a focus on creating safe and inclusive work environments where individuals can bring their whole selves to work without fear of discrimination or bias. This can be achieved through education and training programs that promote allyship and cultural competence. Finally, we will continue working hard to expand the network and reach of Out Investors, connecting LGBT+ professionals globally and providing them with a supportive community and resources for professional development.
For further information on Out Investors please visit their website
Nick Klimchuk (left) and Alberto Padilla (right) Co-Chairs at Out Investors
Global Regulatory Update
From a CLO perspective, the US regulatory landscape has been dominated by the Corporate Transparency Act ("CTA"), which came into force on 1 January 2024. The legislation ushers in a new beneficial ownership information ("BOI") compliance framework for the US, in line with global antimoney laundering and counter terrorist financing standards.
New disclosure requirements have been implemented for both domestic and overseas entities registered to do business in the US. CTA filings including BOI Reports for new formations in 2024 must be submitted within 90 days, while the deadline for existing entities is 31 December 2024. Any updated BOI Reports must be submitted within 30 days of any changes taking place. Failure to provide BOI to FinCEN under the CTA may result in both civil and criminal penalties.
Most CLO Managers are Filing BOI Reports for Co-Issuers
With the CTA potentially capturing US-domiciled CLO co-issuers and issuing subsidiaries, managers should be in discussions with US counsel to gain a full understanding of their exposure and the applicability of any of the 23 exemptions.
Many managers noted during panel discussions at The Annual CLO Industry Conference in New York in April that they are taking the prudent approach and opting to file BOI Reports for CLO co-issuers given the absence of a clear exemption under the CTA for such entities. Other managers, however, are taking the view that the co-issuer's ownership interests are, in effect, fully controlled by the collateral manager (a registered investment advisor) through the offshore CLO issuer and have gotten comfortable in qualifying for the CTA's 'subsidiary of an exempt entity' exemption.
CTA Filing Overview
With respect to the CTA filing process for onshore co-issuer and issuer subsidiary vehicles, we note the following key considerations.
EINs
Since co-issuer vehicles are treated as disregarded entities for US tax purposes, they will either need to obtain their own Employer Identification Number ("EIN") if they do not currently have one, or, utilise the US Tax Identification number of the issuer, if available. It is important to note that EINs can be used only once, which means that if a parent entity has multiple subsidiaries, this limitation could affect their tax filing process.
Given the number of co-issuer filings coming due in 2024, managers will be well served to begin applying for EINs now to avoid late CTA filings that may be caused by the IRS limitations (of one per day, per responsible party) on the issuance of EINs.
Ownership Interest
The ownership interests of the onshore co-issuers are ultimately held under a Cayman Islands charitable trust with no individuals, directly or indirectly, owning more than 25% of the ownership interests of the co-issuer or issuer subsidiary vehicles.
Substantial Control
Onshore Co-Issuer: Managers and directors to the US co-issuer and issuer subsidiary vehicles.
Offshore Issuer: Market consensus seems to have settled on the view that the offshore directors need to
Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN's regulations.
be named as beneficial owners, due to their decision making on behalf of the offshore issuer, which in turn is the sole member of the onshore co-issuer.
Company Applicants
Filing requirements under the CTA extend beyond the entities and their beneficial owners to include individuals involved in the formation processes. This includes individuals at the corporate service providers that file formation or registration documents with the secretary of state. Other personnel, including attorneys or managers engaged with establishing and operating the entities may also be in scope of these requirements, necessitating a broader understanding of who is obligated to comply with the CTA.
National Small Business United v. Yellen
On 1 March 2024, in the case of NationalSmall BusinessUnitedv.Yellen,a federal district court in the Northern District of Alabama ruled that the CTA is unconstitutional. The Justice Department filed an appeal on 11 March 2024. While the decision introduces a degree of uncertainty regarding the future of the CTA, FinCEN intends to proceed with the implementation as originally planned.
FinCEN stated in an alert: "Otherthantheparticular individualsandentitiessubjecttothecourt’sinjunction, asspecifiedbelow,reportingcompaniesarestill requiredtocomplywiththelawandfilebeneficial ownershipreportsasprovidedinFinCEN'sregulations."
This underscores a 'business as usual' stance with respect to the CTA's filing obligations and managers should continue to file in accordance with the prescribed deadlines.
Beneficial Ownership Amendments in the Cayman Islands
The Cayman Islands beneficial ownership registration regime (the "BOR Regime") has been amended. The amendments are expected to come into force later year, after the related regulations are finalised and published. The BOR Regime is being expanded to include partnerships and other entities that were previously not in scope. As well, most exemptions are being removed and additional information will be required in respect of registrable persons. Most CLO issuers have been exempt from the BOR Regime and will no longer be exempt under the amended regime. For such CLO issuers, it is expected that the Maples Group will be able to provide a full in-house solution to meet the new requirements, which should not require any input from the collateral manager.
This article does not constitute tax or legal advice and managers should work with their tax advisors and US counsel to determine their own particular situation.
Private Credit CLOs
Private Credit Leaves Lasting Image on US CLO Sector
The private credit market memorably thrived in the postCOVID, higher interest rate environment. At the same time, traditional lending was curtailed by the US regional banking crisis and a general tightening of lending criteria amid growing economic uncertainty, further fuelling demand for private credit lending. The dramatic ascent of private credit has now created an enduring impression on the global asset management industry, which recently has been extended to the CLO sector.
Private credit CLOs - backed by loans by private credit firms (often an affiliate of the CLO manager) - have emerged and have been embraced by CLO managers, particularly in the US. Private credit CLO issuance surged last year delivering strong returns for investors. Citing Citi research, the LSTA said that, by September 2023, private credit CLO volume was tracking 40% ahead of its 2022 full year volume. As BSL CLO volume fell by a third in these conditions, private credit CLO issuance doubled.
As the growth of private credit has filtered through the world of institutional finance, it is no surprise that CLOs have provided a key conduit for these assets. CLO structures have remained resilient, tested through numerous market cycles. To date, there has not been a default in any Triple-A or Double-A rated CLO tranche. According to Trepp analysts, with the popularity of the direct lending space, buyers of BSL CLOs are expected to participate in private credit CLOs, as the loans they would usually be exposed to are now being facilitated by private debt firms.
This 'golden moment' for private credit has flooded the sector with capital and specialist credit managers in the sector, such as Blackstone and Brightwood Capital Advisors, among many others, have launched private credit CLOs. According to Preqin, private capital assets under management grew 8.04% annually between 2010 and 2016, and then posted annual growth of 16.8% from 2016 to 2022,
reaching US$15.1 trillion in June 2023. BlackRock has said it expects the private debt market to double from here to US$3.5 trillion by 2028. CLO managers have adapted to the new environment, leveraging on the growth in private credit lending and churning out private credit CLO deals at pace.
Middle Market Convergence
Middle market CLOs are traditionally backed by senior secured loans to small companies, with an EBITDA of up to US$100 million, in contrast to BSL CLOs which are backed by leveraged loans to large firms. As the middle market sector has expanded, it has converged with the private credit space and now represents around 20% of the US CLO market, according to Bloomberg, compared to its historical level of around 10%.
Barings analysts note that the loans in middle market CLOs typically provide tighter covenants and credit agreements relative to BSL counterparts, which can ultimately lead to improved recovery rates. Additionally, the broader private credit CLO universe also includes larger-cap private loans, where corporate issuers are willing to pay a higher spread with tighter covenants for the convenience and certainty of execution.
Going forward, further evolution of the CLO market is expected to include bespoke hybrid structures that blend portfolios of broadly syndicated loans with allowances for private credit or lightly syndicated loans. These hybrid CLOs could benefit from diversity of assets, with spread pickup and potentially higher returns compared to traditional BSL CLOs, Barings said.
Looking further ahead, Bank of America said of the US$110 billion of new US CLO issuance expected for 2024, middlemarket / private credit CLOs will account for US$35 billion of that volume, reflecting the shift in the lending landscape towards private credit loan financing.
2024 Focus on Resets and Refis
Signals from the Federal Reserve in late 2023 that interest rates had peaked, reinvigorated the BSL CLO market. This has driven US CLO issuance to record levels at the start of 2024. Lower spreads are likely to keep much of the focus in 2024 on refinancing / resetting CLOs coming to the end of their non-call periods, in addition to new issuances. Nevertheless, the momentum now established by private credit CLOs and middle market CLOs looks set to continue.
Maples Group Market Review
At the Maples Group, we have seen an increase in instructions for private credit CLOs in late 2023 and the first half of 2024. The indication is that private credit managers expect to expand their offering going forward, while several CLO managers who have traditionally issued BSL CLOs have also expressed interest in the private credit CLO market space. Anecdotally, private credit has been one of the most resilient asset classes during the period of higher interest rates. With predictions that interest rates are likely to remain high for most of 2024, we anticipate that the appeal of investing in private credit CLOs will continue to grow.
345 814 6111 nicolas.rogivue@maples.com
Jaco Smit +1 345 814 5872 jaco.smit@maples.com
Meg McAuley +1 345 814 5282 meg.mcauley@maples.com
Your Global CLO TeamA CLOser Look
Joe Jackson
Associate | Legal Services | Finance
+1 345 814 5287 | joe.jackson@maples.com
What did you do before working at the Maples Group?
I started my training contract with the Maples Group right out of law school at 23. I was drawn to the firm because of its reputation and pursuit of excellence. Their core values aligned with mine and the synergy matched - it just made sense. Ten years later, it is still working just fine. I feel a real sense of pride.
What is your life motto?
Breathe, let go and remind yourself that this very moment is the only one you know that you have for sure.
What do you like to do in your spare time?
Working in a high-stress, demanding role, it is important for me to stay as active as possible. Whether its weightlifting or running around after our four-year-old son, it is all about finding that balance, re-connecting with family and staying on top of my fitness goals.
Michael Drew Vice President | Fiduciary
What did you do before working at the Maples
Group?
From a finance perspective, I was always a jack of all trades. I started off my career in letters of credit, then moved to fund accounting and collateral administration before landing in corporate services. I've never left, so presume that I must enjoy it. I also had the usual gigs during my time in college, working in retail stores and McDonald's, which helped pay the bills and a few pints as well. Like many people from Ireland, I did a couple of stints working overseas, spending some time in Luxembourg and 10 years in London, but like a boomerang, I ended up back in Dublin. At the end of the day, it's been important to be back home near family and of course it’s quite hard to get a decent pint of Guinness anywhere else!
What do you like to do in your spare time?
Nothing too outlandish really, other than spending time with my family and friends and playing golf and football badly. I wouldn't say that I enjoy playing sports badly, but I've come to realise that's the level I am at. I don't mind socialising over the odd pint as well, but as I've gotten older, I tend to avoid school nights.
Prior to joining the Maples Group, I was a Partner and Co-Head of the Banking & Finance practice at AKD Luxembourg.
Before that, I spent 15 years at Dentons Luxembourg (formerly OPF Partners) where I started my career as a junior corporate lawyer in 2002. In 2007, I had the opportunity to join the Banking & Finance practice of the firm and played an active role in the development of the practice, then I was promoted to Partner in the Banking & Finance practice of the Luxembourg office in 2012. I also served as non-executive director in a multinational company between 2012 and 2017. Since 2006, I lecture Luxembourg corporate and finance law at the faculty of law of Nancy (France).
What do you like to do in your spare time?
In my spare time, I like travelling abroad to discover new countries and cultures. I also enjoy cooking and practising sports. I am a fan of motorsports, I started racing in karting when I was 16 and now practise occasionally with my daughter and friends. I also devote some of my spare time to social actions of Rotary of which I am a member.
If you could add a word to the dictionary, what would you add and what would it mean?
If I could add a word to the dictionary, that word would be "sustegrity". It's a term that captures the essence of sustainability, integrity and transparency – three critical components of ethical business and environmental practices. "Sustegrity" addressees the need for decisions that are transparent and committed to long-term ecological and societal health. Imagine a world where every corporate strategy not only aims for profit but also for a positive, sustainable impact. This is what "sustegrity" means.
A Global Team
Our CLO team comprises 33 specialist CLO lawyers and 63 specialist CLO fiduciary professionals across our global network. Since the inception of the CLO market over 20 years ago, we have provided our clients with the benefit of our unparalleled depth of knowledge, experience and insight into what we see across the whole structured finance market, from the latest warehousing structures, to the latest regulatory developments and how they impact CLOs, to ongoing post-closing CLO issues.
For further information, please speak with your usual Maples Group contact or the primary CLO contacts below.
Legal Services
Cayman Islands
Scott Macdonald +1 345 814 5317 scott.macdonald@maples.com
James Reeve +1 345 814 5129 james.reeve@maples.com
John Dykstra +1 345 814 5530 john.dykstra@maples.com
