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This isn't something new. In the past, credit hedge funds have taken assets that they own and gotten term financing thru CLOs/CDOs. - they would retain the equity (or most of it) and sometimes even the junior mezz. So, the idea of using CLOs in this case makes perfect sense. However, for CLO debt buyers it would be good to keep a close eye on what the transfer pricing will be for the assets going into the CLO - particularly illiquid or smaller loans. Will be interesting to see the market value vs the par value subordination for the AAA to A CLO notes.
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Blackstone borrows to boost lending power of $52bn credit fund A few thoughts: 1) 20% CCC loans - far above threshold common for CLOs which typically have a max of 7.5% 2) Illiquid private credit should get a recovery haircut relative to Bank Syndicated Loans which have more market makers. 3) Conflicts of interest: As the article notes (excerpt below) CLO investors are protected from conflicts because Blackstone owns the equity. Really? Does owning the equity really help manage conflicts? I would argue owning the equity could exacerbate conflicts. And for the AAA, where is the conflict mitigation when equity is wiped out? I wrote about conflicts of interest between CLO managers and their private equity affiliates in my 2020 article. Where are the Ratings Agencies on this? "BCRED plans to hold the equity of the CLO, which will help avoid potential conflicts over how it decides what loans remain in BCRED and what go into the new CLO, two people said." #privateequity #privatecredit #clos #ratings https://on.ft.com/40EkFh9 via @FT
Yes transfer pricing is where a buyer's pencil needs to be sharp.
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8moThis market is getting frothy? What do you think?