The Increasing Participation of CDO Funds in European Mezzanine


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The Increasing Participation of CDO Funds in European Mezzanine

  1. 1. The Increasing Participation of CDO Funds in European Mezzanine Faith Bartlett Global Head of Marketing and European Leveraged Loan Investments Barclays Capital Asset Management
  2. 2. Agenda <ul><li>Overview of Barclays Capital Asset Management </li></ul><ul><li>The increasing incidence of CDOs in Europe </li></ul><ul><li>CDOs as investors in mezzanine </li></ul><ul><li>The way forward with CDOs as investors </li></ul>
  3. 3. Barclays Capital Asset Management (‘BCAM’) <ul><li>BCAM is the ring-fenced third party fund management subsidiary of Barclays Bank Plc. </li></ul><ul><li>BCAM manages funds investing in European high yield bonds, leveraged loans, mezzanine loans and global distressed debt. </li></ul><ul><li>CDOs are at the core of BCAM’s business plan and are expected to contribute around two-thirds of total assets under management. </li></ul><ul><li>BCAM has one of the largest dedicated European high yield asset management teams with 20 professionals globally. </li></ul>
  4. 4. BCAM’s funds under management <ul><li>Funds currently under management are in excess of </li></ul><ul><li>€ 1 billion </li></ul><ul><li>CDOs managed to date: </li></ul><ul><li>Blue Eagle CDO I (€500m) </li></ul><ul><ul><li>Primarily European HYB fund, minimum 65% </li></ul></ul><ul><ul><li>Closed in December 2000 </li></ul></ul><ul><ul><li>Currently outperforming the large majority of other asset managers and European arbitrage CDOs in the market </li></ul></ul><ul><li>Jubilee CDO I (€500m) </li></ul><ul><ul><li>Closing Nov-Dec 2001 </li></ul></ul><ul><ul><li>Focus on European senior and mezzanine leveraged loans, min 80% </li></ul></ul>
  5. 5. The increasing incidence CDOs in Europe <ul><li>An Arbitrage Collaterised Debt Obligation (‘CDO’) is a leveraged vehicle that issues rated debt and invests the proceeds in underlying assets typically across a portfolio of senior loans, mezzanine loans and/ or high yield bonds. </li></ul><ul><li>Arbitrage CDOs have existed in the US for almost 10 years, the first European deal was issued in mid-1999. </li></ul><ul><li>The European institutional market is growing at an increasing pace – only two institutional investors in 1999 compared to over 20 by mid-2001. </li></ul><ul><li>Current arbitrage CDO European issuance is estimated around €7bn, with an additional estimated €7bn planned to be issued over the next year. </li></ul><ul><li>A rating agency study issued in August 2001 reported that actively managed pools of assets substantially outperformed the overall high-yield market in 1999 and 2000 in respect of default rates. </li></ul>
  6. 6. European CDO Managers’ Share of the Primary Market for European Leveraged Loans ( Excludes U.S. Dollar Tranches) Source: PMD
  7. 7. Key European CDO and institutional investors <ul><ul><li>BCAM – </li></ul></ul><ul><ul><li>Blue Eagle I </li></ul></ul><ul><ul><li>Jubilee I </li></ul></ul><ul><ul><li>Axa – </li></ul></ul><ul><li>Concerto I & II </li></ul><ul><ul><li>ICG – </li></ul></ul><ul><li>Eurocredit I & II </li></ul><ul><li>Promus </li></ul><ul><ul><li>Prudential M&G </li></ul></ul>
  8. 8. Primary Market for 1999 – 1Q-3Q01 European Leveraged Loans by Investor Type; Excludes U.S. Dollar Tranches Source: PMD
  9. 9. What do traditional arbitrage CDOs want to see in European mezzanine? <ul><li>Larger deals to allow access to mezzanine product </li></ul><ul><li>Conservatively structured to support default rating from rating agencies </li></ul><ul><li>Euro denominated, due to liability funding </li></ul><ul><li>Second ranking security packages via contractual subordination. </li></ul><ul><li>Healthy cash pay margin – minimum 350bps. </li></ul><ul><li>PIK – can get credit for CDO vehicle from rating agencies, but if too high can signal concerns on the underlying credit quality. </li></ul><ul><li>Warrants - although no value given to CDO vehicle by rating agencies, does give upside for CDO equity holders </li></ul>
  10. 10. Larger deals? Average European Leveraged Transaction Size (Source: Fitch)
  11. 11. Greater Volumes? European TL-C and Mezzanine Volume ( Source: PMD)
  12. 12. Conservative Structures? Average European LBO Leverage Statistics Rolling-Three Month Average Pro Forma Debt/EBITDA Ratio (Source : PMD)
  13. 13. Attractive Return? Total Spread on Mezzanine Debt by Volume (Source: PMD)
  14. 14. Minimum Cash Pay? Cash Pay Portion on Mezzanine by Volume (Source: PMD)
  15. 15. Availability of Warrants? Analysis of Warranted European Mezzanine ( Source: PMD)
  16. 16. Mezzanine and CDOs <ul><li>Perfect mezzanine for CDOs: </li></ul><ul><li> </li></ul><ul><li>Second ranking collateral (fixed + floating charges and full cross guarantees). </li></ul><ul><li>Euro denominated </li></ul><ul><li>Minimum cash pay margin of 400bps. </li></ul><ul><li>Warrants – sufficient to generate IRRs in typical 16%-20%+ range. </li></ul><ul><li>Public or private loan rating </li></ul>
  17. 17. Recent mezzanine transactions including CDOs as participants 49.0% 6.5x 4% 350bps 350bps Oct-01 Cannons 68.2% 4.4x 6.8% 300bps 350bps Sep-01 Cegelec 41.3% 6.96x - - 600bps Jul-01 Le Meridien 53.7% 5.50x 6% 400bps 400bps Mar-01 Picard 70.6% 5.88x 3% 350bps 400bps Jan-01 Baxi 43.3% 5.2x - 250bps 450bps May-00 Elis Debt as % of capital structure Day One Leverage Warrants PIK coupon Cash pay coupon DATE CREDIT
  18. 18. A temporary phenomenon? <ul><li>As seen in the US, likely to be ever increasing CDO and institutional investor presence in the European Leveraged Market. </li></ul><ul><li>Unlike some traditional bank participants, CDOs will remain committed to the leveraged market by virtue of the life of their funds (12+ years). </li></ul><ul><li>Ongoing popularity of mezzanine as a debt instrument, given recent problems in the High Yield Bond markets combined with greater demand from Banks, CDOs, Institutions and specialist mezzanine providers. </li></ul><ul><li>Equity houses still have sizeable funds to put to work and therefore ‘the tap should carry on running’…… </li></ul>
  19. 19. The way forward….. <ul><li>Greater pressure on arrangers to restrain leverage levels during current global economic turbulence </li></ul><ul><li>Continued draw towards defensive credits during times of economic volatility </li></ul><ul><li>Greater institutional investment will accelerate the move towards a public rated primary loan market and more liquid secondary loan market </li></ul>