Managers of leveraged-loan vehicles are cutting fees in an attempt to get new deals over the line, as the market struggles to rebound from a sharp sell-off at the end of last year.
A deal arranged by Barings earlier this year was among those that have reduced fees to attract investors, according to people familiar with the terms. Some of the largest managers of so-called collateralised loan obligations, which bundle leveraged loans together to back slices of debt and equity, say that they have found raising investor capital more challenging, even if they have not had to offer discounts.
“There are definitely concessions being made to get deals over the line,” said Jim O’Brien, co-managing partner of $11.9bn-in-assets Napier Park, which both issues and invests in CLOs. Napier Park has not yet issued a CLO in 2019.
Barings, a Charlotte, North Carolina-based firm with a total of $300bn under management, declined to comment.
The market for leveraged loans — issued to low-rated or heavily indebted companies across the US — has struggled to regain its footing after a downturn in prices in December, when investors began to fret about the outlook for the global economy. Last month’s decision by the Federal Reserve to talk down prospects of further US interest rate increases was another factor weighing on demand, as floating-rate assets such as loans and CLOs benefit as rates rise.
“Last year there was very little resistance — it was easy to get a deal done,” said one CLO investor. “It was different from most of my career. We are now back to the norm. Not everyone can print a deal at will.”
CLOs work by passing repayments on risky loans through to bond and equity investors. Equity investors, who stand first in line to take losses if the underlying loans default, receive any cash left over after paying bondholders. They are also responsible for paying management fees to firms such as Barings that structure CLOs.
New sales of CLOs have slowed this year as investors in the bonds have demanded higher rates of interest to support new deals. The spread above Libor for the highest-rated debt tranches of new CLOs has risen above 130 basis points for the first time since the middle of 2017, according to data from LCD, a division of S&P Global.
Typically, experienced CLO managers receive between 0.4 to 0.5 per cent of the value of a new deal in annual fees. But this has dropped to around 0.3 per cent in some instances, according to multiple CLO managers and equity investors.
That means that on a $500m deal, fees have fallen by up to $1m a year.
“It makes sense to keep the machine going,” said Stephen Ketchum, founder of Sound Point Capital, a $20bn hedge fund and CLO manager. “Everyone takes a little pain but it’s still a good thing to keep the market moving forward.”
Mr Ketchum said Sound Point had not cut fees on its own deals.
Get alerts on Capital markets when a new story is published