The bumper growth of the private credit industry in recent years has left plenty of financiers desperate for a slice of the action. But that desperation is leading to confusion in the US CLO market.
Private credit CLOs are on everyone’s lips in CLO land, as private credit funds look to finance more lending and investors are wooed by the prospect of exposure to the hottest new asset class on wall street.
But what, exactly, is a private credit CLO?
Some are happy to use the term interchangeably with the well-established “middle market CLOs”, a segment of the market that is taking a larger portion of the total US CLO market than ever before. It is true that Moody’s, for example, still rates all private credit CLOs with its middle market methodology.
Yet other senior market participants are aghast at such a cavalier attitude to labelling deals. They highlight key differences between the two, defining a private credit CLO as comprising loans to very large companies while saying middle market CLOs should only be those holding loans to companies with an Ebitda of less than $100m.
If they are essentially the same product, then the name change is nothing more than a gimmick. If they are not, then questions around whether private credit CLOs need their own ratings methodology or regulations will soon arise.
This is important because investors need to be convinced they know what they’re buying for the asset class to avoid accidents. One banker told GlobalCapital that getting traditional CLO investors on board has been a significant challenge in growing private credit CLOs as a product.
Other bankers lament that the term “private credit CLO” even exists. One argued that it had only emerged as certain large banks, which had barely batted an eyelid at the middle market CLO space for the past decade, wanted a piece of the pie.
To some degree, it's natural that middle market CLOs should grow alongside the private credit boom. After all, many of the old-fashioned middle market “direct lenders” are now private credit behemoths.
But the market needs to come up with some definitions. Or else it will be about as exciting a development as Elon naming his latest toy ‘X’.