European CLOs stepped out of this week’s market turbulence with nothing more than a bruise. CVC postponed the refinancing of some junior mezz tranches. Polus Capital priced a new issue a little wide of guidance, though sources close to the deal said August holidays could be as much to blame as the volatility spike.
The leveraged loan market was barely impacted, mostly because there were hardly any deals in the market.
But it showed again how quickly the market can turn, and the speculation about dollar interest rate cuts and a US recession proved how fragile some of the belief in a soft landing is.
Investors generally agree that defaults will increase, and recoveries will be lower than they used to be. Interest rates are not expected to go back to zero. In this new era, tiering between CLO managers is expected to become more pronounced, and how they deal with restructurings and liability management exercises will be an important factor.
The traditional approach has been to package some debt into a payment-in-kind deal from a holding company to give the struggling borrower more time, hoping that another year or two will help the recovery.
But there is only so much road to kick the can down. With stories of creditor-on-creditor violence increasingly coming from the US to Europe, investors will demand a more sophisticated and proactive approach.
Monday’s panic was yet another wake-up call for anyone still dreaming of the steady return to a world of free money and boundless growth.