Ex-Credit Suisse dealmakers are shaking up $1.3 trillion junk-bond market

By Lisa Lee and Carmen Arroyo

A crowd of large global banks is starting to muscle in on the lucrative business of arranging collateralized loan obligations, another sign that life’s returning to this crucial $1.3 trillion corner of corporate finance.
 

Credit Suisse used to be a big arranger of CLOs — vehicles that buy up junk-rated company loans, bundle them together and sell them as bonds. But the Swiss lender’s demise has opened the door to a raft of new contenders including Canada’s CIBC, the Bank of Nova Scotia and Spain’s Banco Santander SA. France’s Societe Generale SA and Japan’s Mizuho Financial Group Inc. are taking advantage to ramp up in Europe.

Drawn by the prospect of fat fees, many of the new arrivals have been busy snapping up ex-Credit Suisse CLO dealmakers for their own investment bank divisions. These individuals are hired by the firms that run CLOs, known as collateral managers, to put the deals together and market them to investors. They can earn more than $1 million for a new transaction.

The market for CLOs, which are sliced up into bonds of varying degrees of risk and reward, has been gummed up for much of the past two years as banks such as JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. stopped or pared back buying the safest and largest “AAA” tranche, though some have started returning. The emergence of Canadian, European and Japanese rivals with chunky balance sheets creates another important source of AAA buyers.

Read more: JPMorgan and Citigroup Are Ramping Up Their Investment in CLOs

“It’s good for collateral managers as they’ll have more choices,” said James Warbey, a London-based partner at law firm Milbank who heads its alternative investments group. “And it may well help keep arranging fees keen.”

CIBC, Santander and others are buying AAAs in US CLO deals they arrange, according to people with knowledge of the matter who aren’t authorized to speak publicly. SocGen and Mizuho have been doing similar in Europe, where the practice is more common, the people said, adding that they’re using a playbook devised by BofA, BNP Paribas SA and others to win deals from CLO managers.

“We started from a good foundation,” said Brad Larson, CIBC’s head of structured products and ex-Credit Suisse banker, pointing to the relationships CIBC already had as an AAA investor. “It allowed us to get a strong start.”

A spokesperson for Santander declined to comment. Mizuho didn’t immediately respond to requests for comment.

Risky Promises

Bank treasury departments often like to buy the AAA tranche because it’s safe and pays a floating rate, and that’s helping investment bankers at the upstart firms win CLO arranging work. At least one bank says it’ll also underwrite a portion of the equity component, the riskiest part of a CLO, according to people familiar. Both these measures are “hugely helpful” to those trying to secure mandates from the firms that manage CLOs, Warbey added.

“The new entrants know a competitive advantage is the ability to offer AAA capital commitments,” said Scott Macklin, head of US leveraged finance at investment firm Obra Capital. “The realistic prospect of gaining market share and driving new, fee-generating business are the primary drivers.”

Underwriting equity is far riskier, and not the only potential peril for banks jostling in a crowded market. To win the arranger mandate, banks are expected to provide credit lines — so-called “warehouses” — to give CLO managers time to gradually buy the leveraged loans that make up their securities.

These credit lines tie up scarce capital in risky lending, but they’ve been structured so that the first 15%-20% of any loss is taken by outside investors and tend to hold up better than other types of corporate finance in times of turmoil. By contrast, underwriting leveraged loans and bonds has sometimes left bankers with billions of dollars of losses on unwanted debt.

David Williams, Scotiabank’s co-head of US structured credit, said: “The CLO arranging business complements the broader build out in credit and has many synergies within the bank.”

Swiss Diaspora

Even before Credit Suisse’s demise, its CLO dealmakers were jumping ship. In March CIBC took on Larson and Gabrielle Garcia, who headed the Swiss lender’s US CLO syndicate business. Santander later hired leveraged-finance bankers from Credit Suisse, including Joel Kent, now in charge of the Spanish bank’s leveraged-finance trading. It previously acquired structured-debt specialist Amherst Pierpont Securities. SocGen hired Credit Suisse’s former head of European CLO restructuring Michael Malek in 2023.

The pool of available bankers deepened after UBS Group AG, which bought its failing Swiss rival last year, decided to keep its CLO asset-management unit and get out of arranging deals.

Recruits came from other places, too. Scotiabank snapped up a large CLO team from France’s Natixis SA as well as other credit veterans, including Credit Suisse’s Benjamin Gohman. In a bout of musical chairs in Europe, CLO specialist Dimitris Papadopoulos decamped from the Swiss lender before joining Deutsche Bank AG, replacing Nikunj Gupta who left to join HSBC Holdings Plc.

“We see a few new ones in the market,” said Michael Schewitz, a CLO investor at Investec Bank. “We don’t have an issue with new arrangers (at least not yet) provided we know the people — which we often do — and they’re not doing ‘off piste’ deals and structures.”

CIBC now ranks among the top 10 arrangers. Santander, meanwhile, set up recent US CLO refinancing deals for Sculptor, Z Capital and Brigade Capital Management. It’s a fast rise after only arranging its first big transaction in November. In Europe, SocGen previously only aspired to co-arrange behind other banks. Now it wants to fly solo, as it has done in the US. The French bank’s “US CLO business is well established, and the bank has arranged US CLOs since 2019,” a SocGen spokesperson said.

A single star recruit can alter the landscape. Jefferies Financial Group Inc. was practically nowhere in European CLO banking before it lured Laura Coady from Citi in 2020, lifting it to number two the year after and then to the top of the European league table for deal arranging, according to Bloomberg data. Citi fell from the top spot in 2019. It was number seven last year.