The European CLO investor base is broadening, thanks to less perceived volatility than in the US market. As well as the stability Europe offers, panellists at IMN's European CLOs and Leveraged Loans conference last month said that low defaults and strong collateral quality is driving renewed interest in European CLOs across the capital stack.

While European investors have dominated the European CLO market recently, Japanese and US investors are increasingly being drawn to the top of the capital stack, in particular - albeit the middle and lower parts remain harder to place. Several investors noted that Europe doesn't yet appear to be as far along the credit cycle as the US and, as a result, investors are viewing the US as more volatile, with Europe a more stable proposition.

One investor pointed out that the European market has been more stable in the past as well. The volatility seen in US CLOs - around the energy sector, for example - has not been present in European CLOs.

Adeel Shafiqullah, md at Och-Ziff Capital, noted that the European CLO market will be strengthened by a greater range of loans added to CLOs and further entice a greater number of investors. "Further broadening and diversification of the European loan pool is beneficial to new CLO issuance, as it improves diversity, mitigates idiosyncratic risk and reduces collateral overlap between portfolios," he said.

However, concerns were voiced that the new investors might be "tourists", drawn by lack of opportunities in other sectors and with less of a long-term view. Shafiqullah commented that the impact of shorter-term capital varies depending on where they invest.

He said: "Regardless of whether there is a growing number of so-called 'tourists', it is certainly important lower down the capital structure to have investors with longer-term, locked-up capital."

As well as renewed interest in the triple-A notes of European CLOs, panellists reported that European CLO equity is finding demand. One investor commented that equity buyers particularly have benefitted in the last three to four years from low defaults and prolonged distributions, as well as the optionality of being able to refinance or reset CLOs (SCI passim).

Indeed, Prytania suggests in a recent client memo that there is renewed value in European CLO equity, which it had previously avoided, given "the lack of clear risk-adjusted value". More recently, however, the firm finds that liability spreads have tightened dramatically due to low supply, with a recent deal printing at Libor plus 163bp, some 50bp tighter than levels in 2013.

Prytania adds that that the leveraged loan market has seen 200bp spread movement in the last 10 years and, as a result, it concludes that European CLO equity could be a solid investment, as it may "benefit from asset spreads when they eventually gap out again over the next few years."

RB