HSBC has been considering entering Europe’s $300 Billion collateralized loan obligations market as an arranger. This is according to sources familiar with the situation.
The people who were not authorized to speak in public said that a decision could be made soon. Nikunj Gaupta was recently hired by the bank as its head of credit structuring to reinforce their existing team. Gupta previously led the European CLO Primary Business at Deutsche Bank.
Bloomberg’s data shows that HSBC did not act as an arranger in the past. Email correspondence from a bank spokesperson was not returned.
The main role of CLO arrangers is to bundle leveraged loan into bonds with varying risks and rewards. They first provide temporary credit lines, also known as warehouses to CLO managers. They then work with managers to develop the deal structure. Then, and this is the most important step, they syndicate deals to the primary market.
Most banks who already invest in CLOs through their Treasury departments are interested in a share of the profits, since it is a great way to add fixed income business.
According to James Smallwood of the CLO-specialist law firm Allen & Overy LLP, the CLO market grew exponentially from 2013 until the Russian invasion of Ukraine and subsequent spike in inflation.
He said that HSBC “sees the potential in the market, which we hope will continue to grow” as a conduit for private capital between the leveraged loan market, international capital markets and the wider market.
BNPParibas SA is currently leading this year’s league tables for European CLO-structured products with over 15% market share. Data compiled by Bloomberg. Barclays PLC is close behind, with 14.8%.
Last week, HSBC acted in a co-placement role on a deal worth £395.4 millions ($417million) printed by Blackstone’s CLO platform Wilton Park. This role is often linked to the purchase of triple-A-rated CLO paper, the safest tranches of securities issued by this vehicle.
In 2022, European banks purchased a portion of the AAA-rated papers of their own collateralized loans obligations. This helped to keep the market afloat as traditional customers had stepped back due to the volatile market conditions following Russia’s invasion in Ukraine. The purchase of AAA-rated paper (which makes up 60%) is seen as a means for banks to increase their market share.
In recent months, new investors have been attracted to the ranks of AAA, by a coupon that is 170 basis points higher than Euribor.
Smallwood said that the diversity of investors in the AAA market is better than it’s been for some time. “European banks continue to purchase but the diversity of names appears to be returning to a higher level.”