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Cathy Bevan serves as the head of structured credit and a portfolio manager for Alcentra’s structured credit funds.

The firm recently announced a huge fundraise across several CLO strategies. 9fin caught up with her to talk about the uncertainty in credit markets, sweet spots in the capital stack, CLO documentation frustrations and whether private credit names belong in CLOs.

1. You’ve had fundraising success for third-party CLO tranche strategies and captive CLO equity with over $1bn raised. What trends did you identify from the fundraising process, and what factors do you think were key drivers of success?

I think we're seeing a lot more interest in CLOs, often from new investors who've not invested in the asset class before.

It feels like a lot of managers, both US and European, fundraising for captive equity funds has had a bit of a positive effect in promoting the CLO asset class in general, not just for captive equity.

From our perspective, we’ve seen interest both from existing investors and also new investor types.

For example, family office and endowments are allocator categories where we’ve seen new appetite. We get the impression that some investors are also not quite as excited about private equity as they once were, and they are realising that they could get returns close to those promised by private equity by investing in CLOs.

In terms of the dollars raised, the lion's share of our recent fundraising has come from large institutional investors who were existing investors in our platform. I think that speaks to the strength of the performance we've seen across our platform, across third party CLO investing and our captive equity product, with some great re-up rates and upsizes from existing investors.

2. How are you thinking about CLO arbitrage in the current market environment?

In 2024 and 2025, we’ve been selective with our investments in CLO equity, focusing on the right managers, with only a few making the cut. We’re currently leaning toward junior mezz, with equity being very manager specific.

Though there’s some softness in the loan market, it doesn’t seem to offer much opportunity for managers to make a big impact in terms of upside on the assets. If CLOs continue to be issued at such a strong pace, loan technicals are likely to remain strong. At the moment, it feels like liabilities have widened more than loans, but that can change quickly. That being said, since the start of the year the 60% plus of European loans trading above par has dropped significantly to around 21 or 22%.

As CLO issuance grows, with more managers setting up new platforms and increasing deal volume, the investor base for debt tranches has also grown but doesn’t seem to have kept pace.

Given the expected issuance volumes for 2025, we were expecting this year to play out similarly to 2021, with strong issuance and reset volumes and debt tranches widening in spring / summer.

The widening however seems to have occurred sooner than anticipated due to Trump, and the current market uncertainty around tariffs makes it harder to place debt tranches.

One interesting aspect of new-issue equity is taking advantage of loan volatility during ramp-up, having priced liabilities in a tight market. We’ve done this successfully on a few recent third party deals, as well as a Jubilee CLO, but it’s hard to time perfectly and can obviously go the other way if there’s a loan market rally during the post pricing ramp-up.

3. February was a record month for European CLO issuance, but the market saw some indigestion and softness in March. How are you approaching this dynamic?

We were definitely expecting this indigestion and softness eventually. We tried to avoid doing too much new issue in February because of that, though we didn't expect the softness to occur so quickly.

It’s quite a difficult market to predict where spreads are heading from here, as there’s a lot of uncertainty. Right now, we're cautiously buying wider new issue knowing that there is a chance it goes wider. Overall we still prefer secondary where we can pick up shorter profiles, because there definitely could be more volatility this year.

There's a lot going on in terms of geopolitical events — potential trade wars, softness in European macro, continuing defaults in the US — so we are generally preferring a slightly cautious approach. That being said, there's definitely good value to be found at the moment in the primary market. We’ve just been deploying gradually.

4. How are you assessing relative value between European CLO and US CLO tranches?

Our view was that the American economy is pretty strong, with rates higher for longer. But that's not necessarily great for the default rate in sub-IG floating rate credit, because obviously higher rates mean the borrowers have to pay more on the debt, and that can be stressful for underperforming borrowers. Obviously, Trump creates a lot of uncertainty, and I think that’s also the case for Europe too with aspects like defense spending and a softer macro environment. A potential Trump tariff war could create more inflation in Europe as well.

The uncertainty that all creates is part of the reason why some people are pulling back from primary at the moment, because the bonds are really long and they just don't know where the market should be. It's very hard to price this risk.

It comes down to being careful about what managers you’re investing with, and I think that’s especially the case in the US given higher default rates. Having said that, the beauty of the US market is that there is so much more diversity of profiles available. You can always find something interesting to do.

At the bottom of the cap stack, we're biased towards Europe given lower loss rates, but we're still active in the US with certain managers and certain profiles. There are definitely opportunities in the US at the top of the cap stack. US dollar triple-As are under pressure in the secondary market so we’ve been active there.

5. As you manage existing CLO investments, how are you approaching resets and refinancings/calls?

As an equity investor, we really like resetting deals because it's much cheaper than doing a new deal. You don't need a warehouse, and you often have the portfolio fully ramped, so you don't have as much loan price risk.

I think that when you have a soft market like this, a lot of debt investors tend to focus on new issue rather than resets and refis because the portfolios are cleaner - and they have so much choice that they can do that. So the problem is that if you’re trying to reset deals in a tough market, it can get quite painful!

As a debt investor, we would generally prefer new issue but we will look at some of the cleaner resets with good managers because they can often price a bit wider, and they don't have the same six week price to close lag that we see in new issue. Again, it’s all very manager specific.

6. Downgrades around the triple-C level remain high but defaults are largely in check. How are you positioning your portfolios in terms of risk management?

Default rates and borrower stress in Europe does look a lot lower than what we see in the US, but triple C and default data is always backwards looking. There are plenty of loans that are triple-C that are going through restructuring that everyone knows are going to default, but that have yet to show in the data.

This means defaults rates in Europe will go up, from a really low level in 2024, though they will probably remain lower than the US.

I think we're going to continue to see idiosyncratic weakness in certain names where they've over levered, underperformed, or maybe something company specific has happened.

Overall, I expect triple-C downgrades and defaults to continue, but I’m not expecting it to be a complete disaster either, just something to watch out for.

We've been through a period, particularly in Europe, with below market average default rates for a long, sustained period of time. I think that's why we're happy to be a little bit more defensive in terms of going for buying mezz, with a focus on shorter bonds, and where we are buying equity, being selective on manager profiles.

7. Are there specific aspects of CLO documentation that you're currently focusing on?

As someone who invests in both debt and equity, we really prefer managers to have flexibility to manage assets through restructuring. I want the managers to do their job and to preserve par for the investors. The preservation of par is great for both the equity investors and the debt investors, so the whole capital structure should care about that. I find it a bit frustrating that some debt investors really seek to curtail managers flexibility to deal with credit issues, LMEs etc.

I’d also love to see CLO concentration limits tightened. I really don't like managers who want to have large concentration limits and I find it strange when managers get upset about not being able to buy 3% positions, or even 2.5% positions.

This is single B credit — no borrower is that defensive! This is a pet peeve I keep trying to push back on, but not enough investors are focusing on this, in my opinion. Both debt and equity investors should be focused on it.

8. What are your thoughts on private credit names in BSL portfolios?

I really can't stand private credit names or the really lightly syndicated, borderline private credit names being in a CLO portfolio. If you can't trade it, it shouldn't be in there. If you want to call the CLO, where is that name going? We’ve seen a lot of smaller BSL names go to private credit and that’s exactly where they should be, rather than an actively managed CLO portfolio.

9.  What’s one thing on your bucket list that you haven’t crossed off yet?

I’m really into scuba diving and I really want to do a Galapagos liveaboard. I need to learn drysuit diving first though as the water can be really cold and I’m a complete wuss!

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