Private credit CLOs are growing from a financing vehicle into an asset management “engine” in the US, said Christine Ferris, head of CLO primary at JP Morgan, at a panel at IMN and Afme's Global ABS conference on Wednesday.
While arbitrage continues to be “challenged” in the broadly syndicated loan market, CLOs comprised of private credit are still attractive, she told the audience in Barcelona.
A weighted average spread of around 550bp in private lending meets a cost of capital above 350bp, according to Ferris.
The market has the potential to expand on several fronts.
Direct lending itself is growing. Ferris’ employer JP Morgan plans to dedicate at least $10bn to private loans. Established lenders in the space such as Ares Management and Apollo Global Management are also preparing for growing demand.
With more money in the market, deals are also getting bigger. “it’s no longer just the middle market,” Ferris said. “It’s the broader asset class.”
This growth is changing how private credit CLOs are perceived, she added.
“Historically, private credit CLOs have been a financing vehicle, but now as we see more and more interest in third party equity, it will blend more with BSL where the CLO is in itself the asset management exercise.”
Private credit is still underrepresented in CLOs compared with its volume. In the US, the private credit market is only marginally smaller than the $1.5tn broadly syndicate loan market, but only slightly more than 10% of the $1tn CLO market is invested in private loans, said Ferris.
In Europe, no private credit CLOs have been priced to date and the trend is unlikely to spill over while even BSL deals are still in short supply, said a CLO banker at the conference.
”I think BSL need to stabilize before people start doing experiments,” said the banker.