Carlyle advances CLOs

Carlyle’s European leveraged loan group and Goldman Sachs have closed the first European synthetic CLO backed by leveraged loans. The pioneering transaction offers many significant advantages over cash deals and, seen in the context of a possible halving in size of the cash market, the trade heralds the opening up of a new sector with tremendous growth potential.

The first bespoke European synthetic leveraged loan CLO was closed late in 2007 by Carlyle and Goldman Sachs. The deal, which references loan credit default swaps (LCDS), offers significant advantages over cash structures and in time could spawn a significant market.

“We feel this market will explode and will become as big, if not bigger than the cash market,” a banker involved said. “The comparison is investment grade CDS, where the notional is in the many trillions of US dollars. We think it is only a matter of time before LCDS notional is in the hundreds of billions.”

Growth prospects are already evident in the European LCDX index, which is due to roll at the end of the first quarter and where the number of names is expected to double from 35 to 70. Along with a continued increase in name diversity, the index is expected to start tranche trading, adding to its allure.

The €300m European Carlyle Synthetic Loan Partners deal does not, however, take exposure to the index itself, but is backed by a bespoke portfolio of single name LCDS – giving it significantly enhanced flexibility to the cash product.

By using single tranche technology, investors are able to come in on a funded or unfunded basis. Investing on an unfunded basis means that buyers are paid yield without having to commit cash, something that gives a huge kicker to the return.

The LCDS single name format also makes it easier to get exposure across a range of currencies, as well as offering investors the opportunity to buy cancellable or non-cancellable contracts. Another advantage over cash is that the deal can be structured as a bullet – in this case as a five-year – which means there is no call risk.