HSBC Is Weighing an Entry Into the $300 Billion Business of Arranging CLOs

HSBC is considering whether to enter Europe’s $300 billion collateralized loan obligation market as an arranger, according to people familiar with the matter.

(Bloomberg) — HSBC is considering whether to enter Europe’s $300 billion collateralized loan obligation market as an arranger, according to people familiar with the matter.

A decision may follow shortly, the people said, who aren’t authorized to speak publicly. The bank recently hired Nikunj Gupta as head of credit structuring in order to strengthen its existing team. Gupta had previously headed up the European CLO primary business at Deutsche Bank. 

HSBC hasn’t previously acted as an arranger, according to data compiled by Bloomberg. A spokesperson for the bank declined to comment by email.

Arrangers of CLOs, which bundle leveraged loans into bonds of varying risk and reward, have three main roles. First, they provide temporary lines of credit, known as warehouses, to CLO managers. Then, they work with managers to come up with the deal structure. Finally — and most importantly — they syndicate the deals into the primary market. 

Typically, banks that are already investing in CLOs via their treasury departments want a piece of the action, as it’s a good fee-making addition to their fixed-income business. 

Market Potential

From 2013 until Russia’s invasion of Ukraine — and the subsequent surge in inflation and series of rate hikes — the CLO market had grown exponentially in both Europe and the US, according to James Smallwood, a partner at law firm Allen & Overy LLP specializing in CLOs. 

HSBC is “likely seeing the potential of the market which will hopefully continue to grow as a conduit between private capital, the wider leveraged loan market and the international capital markets,” he said.

BNP Paribas SA currently heads up this year’s league table for arranging European CLO structured products, with over 15% of market share, according to data compiled by Bloomberg. Barclays PLC follows close behind with 14.8%. 

Last week HSBC acted as co-placement agent on a €395.4 million ($417 million) deal printed by Blackstone’s CLO platform Wilton Park. Such a role is usually linked to purchasing some of the CLO’s triple A-rated paper, which is the safest tranche of securities issued by the vehicle.

In 2022 European banks bought up a chunk of the AAA-rated paper of their own collateralized loan obligations, helping to keep the market afloat after traditional customers stepped back amid the volatile market conditions that followed Russia’s invasion of Ukraine. Purchasing AAA-rated paper, which makes up 60% of the CLO, is also seen as a way for banks to gain market share as arrangers. 

However, recent months have seen an uptick in new entrants among the ranks of AAA investors, tempted by a coupon of 170 basis points over Euribor.

“Right now the AAA investor base is healthier than it has been for a reasonable amount of time in terms of diversity of players,” said Smallwood. “European banks are still purchasing but the variety of names in the book looks to be getting back to a more diversified level.”

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