The Evolution of Private Credit and Its Impact on CLO Management

Alison Roth

SVP, Division Manager, CLO and Leveraged Loan Services

 

As more asset managers' loan origination volumes continue to grow through the private credit market, the lines between middle market and broadly syndicated loans (BSL) can no longer be viewed in the same manner as they have been in years past. Once dominated by large banks and a small population of lenders, loan originations by nonbank lenders without broad syndication is becoming increasingly popular. This shift is driven by growing demand for private credit solutions amid increased bank regulation and market dislocation, with investors searching for higher yields. However, as this trend continues, asset managers issuing CLOs in this space must contend with a host of new complexities.

The private credit market has grown from roughly $725 billion in 2018 to roughly $1.7 trillion in 2023, with asset managers in the upper middle market segment finding different ways to finance their origination. Larger loans may represent a greater share of their portfolio, thereby increasing exposure to a single borrower or sector. To mitigate this risk, managers are finding diverse ways to finance their origination platform which requires more frequent and more detailed monitoring of their financing vehicles. Failing to manage various financing structures, each with their own unique tests, across an increased number of borrower names they are tracking could lead to market dislocation and portfolio instability.

Furthermore, private credit managers need support for more complex loan terms, extensive deal negotiations with syndicate members, and accompanying legal documentation. In the initial stages of a deal, a trusted third party is needed for understanding deal mechanics and portfolio tests while conducting the calculations outlined in governing agreements.

Finally, as test requirements for credit facilities and CLOs evolve, there is greater demand for more robust data, analytics, and reporting support. Asset managers need to be able to track, analyze, and report on more complex loan portfolios while ensuring the data is reconciled against their counterparties. Inaccuracies and delays in data could impact portfolio performance, trigger compliance violations, and delay CLO waterfall calculations—not to mention erode investor confidence. In today's market, transparency, automation, and efficiency in data reporting are no longer optional—they are critical to one's competitive edge.

As the corporate loan market evolves, asset managers must consider how these changes will affect not only their financial objectives, but also engage trusted partners dedicated to the administration of their CLOs and leveraged loan facilities.

What are you seeing in the market and how is it affecting your portfolio? Send me a note at Alison.Roth@Computershare.com.

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