Overview
Until very recently, if you wanted a better understanding of what was going on in Europe’s Collateralised Loan Obligation (CLO) market, you would have to delve into the performance of each individually managed vehicle, or use a roughly-calculated proxy. The market was incredibly opaque - even secretive. But visibility in the sector is now improving with the introduction of new indices in Europe.
This week’s Chart Room shows one of these - the JP Morgan Euro CLOIE Index, the first benchmark for broadly-syndicated Euro-denominated CLO debt. This index gives metrics dating back to December 2017, providing investors with a framework to compare returns to other asset classes across different ratings or durations, and through different periods of volatility.
As an example, the data shows the relative resilience of European CLOs, despite the volatility that has hit the wider leveraged finance sector. Returns across both the high-yield and investment grade portions of the European CLO market have outstripped those from equivalent corporate bond markets over recent years. Even throughout the volatility of 2022, overall CLOs did not struggle as much as the investment grade bond market.
There’s also more information available on the relative risks of each CLO basket. The index highlights how various CLO tranches of different ratings can offer very different returns, but also that these baskets can perform very differently to traditional fixed income debt or leveraged loans of the same rating.
Indeed, more data is now available on this sector than at any time in its history: since JP Morgan launched the CLOIE in early March, two more indices covering the European CLO market have also been established. They open up the market for investors by increasing transparency and providing tools for navigation.
We have seen participation in European CLOs surge in recent months. Private banks have become more active on the buyside, as have US hedge funds, while the world of CLO managers is also growing. We expect more than 70 firms to be managing vehicles by the end of the year, up from around 50 before 2020.
There is some way to go of course before the €225 billion-European CLO market reaches the size of its US counterpart, which at present tops USD $1 trillion. The market across the Atlantic is well provisioned with CLO indices which give investors a clearer understanding of the product. Such transparency has helped open the market to retail investors, accessible through the introduction of CLO exchange-traded funds (ETFs). There are now some 10 such funds managing around $8.9bn of retail money[1], the first having been launched in September 2020.
This development is all to come in the European CLO market, as liquidity continues to improve and confidence builds. The introduction of indices is a big step forward.
[1] According to LSEG Lipper
