John Murphy is a partner and head of syndicated debt at Bridgepoint Credit. He joined the firm in 2020 from EQT Credit which was acquired by Bridgepoint in 2020.

Prior to joining EQT in 2019, he worked at Cairn Capital, responsible for the firm’s CLO and leveraged loan strategies as well as structuring and development of new opportunities within the leveraged finance business. He previously worked at Deutsche Bank.

He spoke with 9fin on some of the challenges facing CLO managers as they ramp up amid the wave of loan repricings, as well as the dynamics between syndicated loans and private credit.

1. Bridgepoint is one of the over 30 European CLO managers 9fin has reported is looking to price a deal in Q1. What are market conditions like for CLO formation?

The early signs this year have been highly encouraging. We opened the warehouse for this current deal in the last quarter of 2023 and considered pricing at the end of 2023, but we thought conditions would be more favourable in early 2024 — and that’s certainly transpired.

There is strong demand across all parts of the stack and we have had some very strong interest from investors from a reverse enquiry perspective. Triple-As have tightened to approximately 150bps and the total cost of capital is trending towards the low 200s. As a result, we are planning to price in the first quarter.

In terms of the ramp of the deal, we managed to acquire a number of comparatively cheap assets towards the end of last year, which was beneficial for us. However, we will have more to do as we look to construct the rest of the portfolio over the course of this year. While current conditions present some challenges, we expect them to progressively improve as the year advances.

2. We’ve heard of a few deals recently where third-party equity investors are starting to invest in transactions. Do you have your captive equity?

We have our own captive equity, but we remain open to distributing minority equity. In recent years, only managers with captive equity funds have been able to execute deals, so it’s been important to have that flexibility.

For those investors who participated in equity over the past couple of years we are now seeing some extremely attractive realised returns as deals are able to refinance given the loan price rally.

However, a more disappointing trend in the CLO space over the last couple of years has been the lack of participation from third-party equity investors. 

This is largely due to an over-emphasis on the day-one arbitrage and conditions at that specific moment. It’s important to remember these vehicles are around for six to eight years.

3. With all these CLOs pricing, there’s obviously a strong demand for loans. Have managers been able to push back on documentation?

Clearly, sponsors and borrowers are leveraging the current market strength to negotiate for more flexible terms, though it's refreshing to see some resistance on some of the more excessive asks.  Notwithstanding the high demand for loans, certain key terms such as J. Crew blocker language, anti-Chewy language, caps on synergy adjustments and call protection, have been maintained.

4. There’s been a flurry of loan repricings in Europe, with €13.17bn hitting the market this year, versus €2.1bn for the entirety of 2023, per 9fin data. How is this having an impact on CLO formation? And what’s the lowest spread a CLO manager is willing to go for these repricings?

We are right in the middle of a repricing wave and every day seems to bring a new repricing to the market. That’s completely understandable from a borrower’s perspective, given where these loans are trading, coupled with the current lack of new money supply in the market.

For some of the older CLO vintages, where the cost of debt is in the high 100s, for instance, these repriced loans are still accretive from an equity perspective. Furthermore, as an existing holder of these loans, if you take that capital back, where are you going to deploy that today? This technical is why we are seeing these prices come through from a tight spread perspective.

There is, however, certainly a floor to where it works from a new CLO formation perspective.  Currently that floor seems to be at 375bps. I personally question whether this is sustainable and I think we’ll see a shift when M&A returns and new money enters the market. As for the lowest spread, it’s a complex question because different vintages have different costs of capital, so what works for one deal might not work for another. Could double B-rated loans go lower than 375bps? Yes, but I think 375bps is likely the current base at the moment for a single-B issuance.

Ultimately, the levels are going to be driven by the cost at which CLOs can raise capital. If CLO liability costs decrease, we can tighten further, but the expected high level of CLO supply also sets a limit to how far CLO liability pricing can go in the short term. As a result, I don’t think we’ll see pricing of loans coming much inside the current levels in the near term.

5. With the lack of loan supply, are you looking at bonds? What’s the relative value between propositions?

In the past couple of years, there has been a lot of utilisation of bond buckets and that’s played out favourably for CLOs driven by the shift in rates outlook. However, if you think about the mechanics of a CLO, they are essentially vehicles for excess cash flow. 

High coupon loans are typically more advantageous from an equity perspective as they drive excess cash flows. Current loan yields likely exceed 8%, with the majority of this being coupons, while yields in high-yield issue are somewhat tighter, around 5.5% to 6.75%.

Therefore, from a CLO perspective, loans are currently the more logical choice. Bond buckets can be used to average down the portfolio price but it’s important to understand that this strategy will significantly back-end cash flows to equity and change the deal’s return profile.

At the moment, we prefer a more normalised CLO structure.

6. Another source of potential supply for CLO managers is the possible private credit refinancings that could go back to the BSL space. 9fin’s private credit team is tracking several deals that are running dual-track processes.

We manage a significant direct lending strategy as well as a credit opportunities strategy, working in close collaboration with both teams reflecting our cross-platform approach to credit investing.

Currently, in the large-cap market, borrowers and sponsors can benefit from much better pricing and certainty of execution in the BSL market for the senior secured part of their transaction. This shift from private credit to BSL is already evident. As a borrower, or sponsor in a large cap situation, accessing those larger pools of capital and having greater flexibility with documentation, alongside potentially saving 200bps of margin, is certainly advantageous.

However, the private credit market remains extremely relevant. For example, our direct lending team operates in the mid-market, where borrowers who are earlier in their lifecycle often work closely with individual lenders. These borrowers typically benefit from such close relationships as it gives them, for example, greater certainty in terms of access to growth capital.

Other areas where private credit remains highly relevant, and I’m thinking of our credit opportunities strategy here, is in more junior, creative capital situations, such as a PIK HoldCo.  Finally, I think private credit can provide support to over-leveraged entities struggling to access the broader BSL market.

7. Has the lack of new money affected the liquidity of the European leveraged loan market? 9fin has reported on several CLOs looking to liquidate. Are BWICs still the best route for this?

In our view, BWICs still offer the best route today for liquidation. In Europe, there is a strong and robust demand for loan paper, so in terms of execution, BWICs are a sensible choice. It’s also crucial to remember the fiduciary responsibility to equity investors to achieve the best bid on the portfolio.

The other important element is that, as the seller in a BWIC, you can control settlement timing. This provides certainty in receiving capital, enabling the efficient liquidation of structures and payment to investors.

In a dislocated environment, this can become more challenging and a private solution might be necessary. However, this introduces pricing transparency issues which would need to be addressed.

Currently, despite the ongoing loan repricing wave, trading in the European leveraged loan market remains straightforward. There is a deep and strong bid, making selling assets straightforward.

8. When will we start seeing M&A and new money deal flow?

When we think about this, several factors come into play, but it appears that a strong pipeline will develop as the year progresses .

From a PE perspective, there is a strong desire from the LP base to start to see realisation from funds. Over the past few years across the sector, this has been relatively low, largely due to a valuation disconnect. However, this gap between buyer and seller seems to have narrowed enough to facilitate realisations.

The second factor is the deployment of capital. Large funds have been raised, resulting in a lot of PE dry powder and those investors want to see their capital being utilised.

The final factor is the cost of capital for financing. Given tightening spreads across the loan market and the reduced cost of capital from a CLO perspective, sponsors and borrowers have regained confidence in execution ability, thereby enhancing their ability to transact at their desired return levels.

All the puzzle pieces are starting to align more constructively, with expectations for further activity in Q2 and more so in H2.

9. What’s your favourite holiday destination and why?

I would have to say Corsica given its low key and laid-back nature combined with a stunning coastline with deserted beaches and crystal-clear water.