CVC Credit Fund To Bolster Liquidity

CVC Credit Partners European Opportunities Ltd placed 175 million euros and 150 million pounds ($232 million) of shares for the vehicle in June, sister publication Thomson Reuters International Financing Review reported. “It’s certainly one of the first of its kind for the asset class in that it’s a listed equity based vehicle, although it does have some similarities with funds such as Alcentra’s European Floating Rate Income Fund that have IPO’d in the recent past,” said Richard Boleat, chairman of CVC Credit Partners European Opportunities Ltd.

The proceeds will be invested in an existing CVC fund, its Luxembourg domiciled CVC European Credit Opportunities fund, which already has a portfolio of 42 positions, comprising 39 corporate credits and three structured finance positions.

The fund is focused on senior secured loans for sub-investment grade companies, which have to make up at least half of its portfolio, but can also invest in instruments across the capital structure such as high yield bonds, second lien loans, and mezzanine debt, as well as structured credits such as CLOs.

The strategy behind the fund is clear: banks cutting their balance sheets and CLOs exiting their reinvestment periods are reducing liquidity just as a wave of leveraged loans need to be refinanced. CVC Credit Partners believes that this “will keep pricing power on new issue loans, and to a degree new high yield bonds, balanced towards investors rather than borrowers.”

Listing the vehicle will also allow CVC to tap pent up retail demand for loans. “There are many market participants who want exposure to the asset class but cannot access it through other means,” said Boleat. “CVC Credit Partners, using this structure, gives these investors an opportunity to participate in the market.”

For leveraged finance bankers, the vehicle is one of a number of bright spots for the leveraged loan market, along with the growing pipeline of new CLOs forming. “It could help us significantly in terms of creating loan demand,” said one banker. The banker added that he viewed the vehicle as effectively being a CLO where the equity component is listed.

Alcentra listed its loan fund last year as did HarbourVest in 2010, but these placements were small scale compared to CVC’s, at 80 million pounds and 101 million pounds, respectively. Another difference is that CVC Credit Partners is a group company of CVC Capital Partners, one of the largest private equity players in Europe and an active user of the leveraged loan market.

The fund cannot invest more than a quarter of its portfolio in debt to CVC Capital’s portfolio companies, but the relationship is advantageous.
As of May 31, the investment vehicle’s largest exposure was to Ista, a German maker of water meters and power meters that was bought out by CVC Capital earlier this year, with 5 percent of the portfolio invested in Ista’s second lien euro debt alone.

The debt raising for the Ista buyout was one of the most competitive this year, with Thomson Reuters Loan Pricing Corp reporting that many accounts were left with small or even zero allocations on the term loan. Although CVC raising a fund of this size is a promising sign for European loan demand, market players are subdued on whether others will follow the template.

“Talking to the big loan investors, they already seem to have more unlevered money than they know what to do with,” said a high yield syndicate banker. “Raising levered funds would only exacerbate their problem.”

Robert Smith is a correspondent for IFR in London.