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Collateralised loan obligations gain traction with German institutions

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Two major asset managers have launched collateralised loan obligations (CLO) funds in Germany in recent weeks as appetite grows for the asset class.

US-based Neuberger Berman and Germany’s Union Investment have both launched their first CLO products.

Neuberger Berman’s fund – registered in Germany, Austria and Switzerland – focuses on CLO mezzanine investments, while Union’s structured credit product invests “mainly” in CLOs.

Dik van Lomwel, head of EMEA and Latin America at Neuberger Berman, said: “We have seen significant interest from clients who are comfortable with non-investment grade credit and are looking to capture the additional yield and fundamental credit enhancement offered by CLO debt.”

Barbara Pohlmann, portfolio manager at Union Investment, said securitisations were “largely immune” to interest rate movements.

Analysts at investment bank Wells Fargo have forecast a new record high of for CLO issuance this year of roughly $150bn (€129bn), beating the previous high of $123.6bn in 2014.

Growing interest in structured credit from institutional investors – including typically more conservative German allocators – reflected a maturing market, but Swiss consultancy Siglo also noted a psychological effect in the wake of the 2008-09 financial crisis.

“The promised high liquidity of a lot of funds and [exchange-traded funds] containing illiquid instruments drives cold sweat down our backs,” the analysts said in a newsletter.

They added that investors had learned that “illiquid investments are more consequent in their illiquidity and therefore hold less potential for negative surprises”.

The Siglo research team warned about asset-liability mismatch in times of crisis if all investors and managers wanted to get rid of assets at the same time.

With truly illiquid strategies and products, the investors should be aware from the start that these investments cannot be sold easily on short notice, Siglo said.

“In a time of low interest rates it would be a shame not to look into illiquidity premiums as they can significantly raise the expected return,” Siglo added.

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