Continental shift: Special report on CLOs

The first European private credit collateralised loan obligation (CLO) has finally been launched. Could this be the start of a new era? Kathryn Gaw reports…

For the past few years, talk of the first private credit European collateralised loan obligation (CLO) has dominated the sidelines of private credit and broadly syndicated loan (BSL) events. But while the American private credit CLO market has gone from strength to strength, the European market continued to lag behind.

Industry insiders were beginning to lose hope that a private credit CLO would ever be launched in the European market. In fact, in the middle of 2024 one private credit expert told Alternative Credit Investor that they did not ever expect to see a private credit CLO launch in Europe. But in November 2024, Barings announced the successful pricing of its debut private credit European CLO – the Barings Euro Middle Market CLO 2024-1 DAC – at €380m (£321m).

The first European private credit CLO had finally arrived.

“The launch of Barings’ private credit CLO marked a significant milestone in the region’s financial landscape,” says Iyran Clunis, EMEA head of sales at Allvue.

“The European market has traditionally faced challenges in creating diversified portfolios necessary for middle-market CLOs. It really comes down to how complex this product is as to why we haven’t seen the execution of true middle-market CLOs in Europe.”

Aaron Scott, a partner in the finance real estate team in the London office at Dechert, worked with Barings on its private credit CLO.  He believes that the Barings issuance will usher in a new era for the European market, with more private credit CLOs to come.

“Since we launched this I’ve had another couple of managers who have reached out, who are at least thinking about trying to structure a European private credit CLO,” Scott told Alternative Credit Investor. “I know there are at least a couple of managers out there who are considering an issuance.”

Scott’s prediction has been echoed by a number of other private credit insiders. The general consensus seems to be that at least two more European private credit CLOs will launch this year. If they are received well, this could mark the beginning of a lucrative new market.

In the US, private credit CLOs have been around since the early 00s, although back then they were referred to as ‘middle market CLOs’. Initially intended to offer a way to securitise corporate loans, they gained popularity for their high yields and ability to offer diversification to investors.

Read more: Eurazeo eschews private credit for upcoming CLO

According to Bank of America data, at the end of 2023, private credit CLOs made up roughly 11 per cent of the $1.3tn (£1.07tn) CLO market in the US. That same year, $27bn of private credit CLOs were issued by 28 managers. The potential of this market is enormous, yet to date it has been concentrated in the US.

The slower pace of progress in the European market has been attributed to several factors. Historically, there has been a lack of sizable asset managers and an insufficient volume of underlying loans. The complexity of European regulations has also made it harder for CLO managers to operate. And the variety of currencies in the European market makes it more difficult to accurately price and access certain bundles of loans.

Barings has reduced the administrative and regulatory burden of its private credit CLO by opting for a static issuance.

“This means that on day one, all of the assets that were going to be in the portfolio were known, and those assets were disclosed to investors, and there’s very limited ability to reinvest or buy assets after the closing day,” explains Scott. “In some ways that simplifies the deal.”

Static CLOs offer several benefits, including reduced management fees due to the absence of active portfolio management, increased transparency and predictability of cash flows, and potentially lower regulatory and compliance burdens. These factors can make static CLOs appealing to the types of investors who prioritise stable and straightforward investment vehicles. They are also much faster to put together. Barings approached Dechert with its private credit CLO in mid-September, and the deal was priced and made public just six weeks later.

“Static structures may become more common in Europe due to investor preferences for simplicity and better risk management, as well as regulatory considerations,” predicts Clunis.

“For instance, differences in national insolvency laws and securities regulations can affect the enforcement of creditor rights and the transferability of loan assets across borders.

“These disparities can introduce additional legal and operational risks for actively managed CLOs that engage in frequent trading or substitution of assets.”

Static structures can also help to streamline the CLO approach by maintaining a fixed pool of assets, thereby reducing the need to navigate the complexities associated with cross-border asset management. For instance, cross-border interest payments within the EU are subject to varying withholding tax rates, which can impact the cash flows and overall returns of CLOs holding assets from multiple jurisdictions. Managing these tax implications requires careful structuring and compliance, adding more layers to active management strategies.

“It’s important to note that the European CLO market is still evolving, and the choice between static and actively managed structures will ultimately depend on investor preferences, regulatory developments, and performance outcomes,” says Allvue’s Clunis.

“It’ll be interesting when we see another one of these European private credit deals as to whether it will be an actively managed deal or whether they will continue down the static path,” adds Scott. “In the US, we see both.”

There is certainly enough investor demand to fuel a European private credit CLO boom, whether the issuances are static or managed. CLOs offer diversification, competitive returns, and access to private markets. They also pave the way for retail access, via CLO exchange-traded funds (ETFs).

Brian Bejile, co-founder and chief executive of Octaura, spent 20 years working in the CLO space before founding Octaura, an electronic trading, data and analytics solution for syndicated loans. He has witnessed first-hand the enormous growth of the CLO market over the past two decades.

Read more: CLO market sees strong start to 2025

“The main advantage of CLOs is diversification,” says Bejile. “That’s because a CLO has a portfolio of loans behind it – typically there are least 100 different loans issued by many different companies. So you have exposure across all those positions and each position is typically less than one per cent of the portfolio. If an issuer defaults, its impact on the whole portfolio is somewhat marginal.”

CLOs also have the benefit of structure, so investors can choose to reduce their risk by remaining at the top of the capital structure, in the AAA tranche.

“It’s definitely a hot space,” says Bejile. “There’s a lot of investment chasing and I think it’s a great opportunity for participants to come in and issue into the market.”

These participants are likely to be large global fund managers, who have previous experience issuing private credit CLOs in the US market. Barings fits this description, as do a handful of other managers.

They will also need to work with experienced teams who can help manage the structuring of the loans. For example, Dechert was able to tap its US office for assistance with the Barings issuance, as they naturally had more experience arranging private credit CLOs in the much more mature US market.

And of course, dealmaking activity will need to pick up in order to create the volume of private credit opportunities required to justify a CLO issuance. Last year, the main driver for new issuance in the BSL market came from refinancings, not M&A activity. The BSL CLO market is viewed by many as a sibling to the private credit CLO market, sharing the same investors, issuers, service providers and sometimes even sharing the same underlying loans. However, the relative maturity of the BSL space better lends itself to refinancing, at least in Europe. For private credit CLOs to flourish on the continent, dealmaking will have to rebound.

Read more: European CLO issuance to double by 2030

According to S&P Global, outside of the private credit space, European CLO issuance is expected to remain high, reaching €135bn in 2025, driven by a broadening base of originators, better lending conditions, and increased market participation from banks seeking funding and risk transfer solutions.

“The same technical factors that drove European CLO new issuance to record levels in 2024 are expected to continue through 2025,” says Clunis. “This should result in similar or higher gross new issuance figures, with a potential increase in refinancings and resets.”

Investor demand is a great motivator, and private credit managers appear to be well aware of the potential of the European CLO market. One prominent private credit player who requested anonymity told Alternative Credit Investor that they are aware of multiple managers that are actively working on or at the early stages of private credit CLO development and issuance.

“Multiple CLO launches per year is still some way off and it’s difficult to say how the evolution of the market will progress given the different dynamics at play versus the US model,” they added. “Most of the managers we are speaking to are considering all options but the hope is for reinvestment to be part of the European model.”

These managers are likely to be watching the Barings issuance closely before committing to their own CLOs. Despite the challenges and complications of a European issuance, strong investor demand and evolving market conditions indicate a promising future for European private credit CLOs. It only takes one trailblazer to lay the groundwork for others.