Sector developments and company hires

SFDR to spur Article 8 CLOs
CLOs may soon be structured as Article 8 funds under the EU Sustainable Finance Disclosure Regulation (SFDR), as part of the rotation of capital towards assets that promote ESG objectives, according to White & Case. The firm notes in a recent client memo that Article 8 funds that invest in CLOs are already emerging and suggests that it is “only a matter of time” before CLOs themselves are marketed as Article 8 funds - with the prospect of Article 9 CLOs to follow.

The SFDR is broader than the EU's Taxonomy Regulation and provides a regulatory framework to mobilise private capital for both the energy transition and the broader UN Sustainable Development Goals (SDGs) agenda. Within four months of the 10 March 2021 effective date of the SFDR, €3trn of funds had been labeled as Article 8 or Article 9. Analysts now forecast that over 50% of the assets under management in Europe will be managed through Article 8 and Article 9 funds as soon as next year.

At the same time, the convergence of ESG and CLOs has been gathering pace since the emergence of ESG negative screening in 2019 (SCI passim). “This convergence exploded in 2021 to the point of ubiquity, with ESG negative screening provisions in European CLO new issuances and resets. 2021 has seen further step changes for ESG provisions in CLOs, with forward-thinking managers introducing subjective ESG scoring across CLO portfolios, as well as the emergence of objective ESG reporting on CLO assets,” the White & Case memo states. 

The firm believes that the SDGs could provide the definitional framework for issuers across markets to access demand for ESG assets. Indeed, 1Q21 saw the first signs of the SDG model in the leveraged loan and CLO markets, with CLOs including reporting on SDG-covenanted assets.

“The missing piece of the jigsaw to facilitate pricing tiering for CLOs has now been filled by the SFDR, which provides the framework for funds to aggregate ESG assets, including those which promote the SDGs,” White & Case notes.

While corporate and sovereign issuers can make direct covenants by reference to the SDGs, the challenge for funds - including CLOs - has been ramping with a sufficient level of ESG assets for the pricing benefit to emerge. White & Case suggests that the SFDR solves this riddle definitively with the promulgation of Article 8 fund structure.

In other news…

Brookfield reopens Euro CMBS mart
Another Brookfield-sponsored transaction has reopened the European CMBS market post-summer (SCI 30 June). Atom Mortgage Securities securitises a £391.2m loan secured by the borrower’s freehold interests in four office (representing 92.2% of loan balance) and two industrial (7.8%) assets in the UK, totaling 1.57m square-feet.

The properties are located across the South East (42.2%), London (36.5%), South West (18.4%) and East of England (2.9%). The assets are leased to 68 tenants, of which the largest - a subsidiary of multinational pharmaceutical company Bristol Myers Squibb - represents 10% of gross rental income and the top 10 represent 54.3%. Occupancy stands at 86.2%, according to KBRA.

The sponsor’s business plan during the loan term is to invest approximately £37m to enhance certain properties (£16.7m) and to increase occupancy and gross rental income via investment in tenant incentives and leasing commissions (£20.3m). There is a £28m capex facility to partially fund the budget.

The mortgage financing - which comprises a £369m term facility and a £22.2m capex facility - was co-originated by Bank of America (accounting for 40%), Morgan Stanley (40%) and Standard Chartered (20%) in June 2021. Bank of America and Morgan Stanley are arrangers on the transaction.

EMEA
Guy Carpenter has appointed Quentin Perrot as md, GC Securities, responsible for the origination and structuring of ILS, collateralised structures and alternative capital, supporting a global client base. Based in London, he will report to Shiv Kumar, president, GC Securities.

Perrot was most recently svp and head of the European ILS team at Willis Re Securities, which he joined in 2014. Prior to that, he was a structurer of ILS products at BNP Paribas.