Optionality, yield a hit with investors

The appeal of repackagings during times of economic stress became apparent during the Covid-related shutdown. Repack issuance is gaining traction among Asian investors in particular, due to the search for yield and the instruments’ customisability.

“The repack product becomes more attractive in times of stress when investors are looking for opportunities more quickly. With the continued low interest rate environment in Asia, the search for yield has always been strong in this region,” notes Scott Macdonald, partner and global head of Finance at Maples and Calder.

Peter Lundin, svp, with the Maples Group’s Structured Finance Fiduciary team adds: “There is optionality for the arranging banks, depending on where the investor is based or based on the underlying assets. We are seeing the highest volumes originating out of Asia.”

In terms of volume, vehicles domiciled in the Cayman Islands are leading. Additionally, Lundin identifies Dublin as a primary jurisdiction and notes that there have also been some issuances in Luxembourg.

Macdonald points out that the documentation and issuance procedures used in the repack industry have become more standardised. However, the range of underlying assets or products has become more diversified.

While investors are able to gain exposure to direct lending funds or private debt strategies through rated repackaged debt tranches, for example, Scope Ratings says the appeal of repackaged debt depends on an investment-grade rating of credit-linked notes. Due to non-investment-grade profiles of private debt portfolios, credit enhancement is required for rated instruments, such as overcollateralisation, additional refundable reserves or a lower instrument notional compared to the fund’s net asset value.

Maples Group highlights the significant role played by credit-linked notes in driving increased repack volumes. Lundin explains: “CLNs add a layer of customised ability for higher yields, which is attractive to investors during times of stress, despite the added layer of credit risk.”

Looking ahead, banks are expected to open up the product to a wider investor base. “We have seen a number of arrangers bring programmes to the market. We expect volume to increase for the remainder of the year and extend into next year. We have also seen an increase in lower deal size over the last few months,” Macdonald concludes.

Jasleen Mann