CLO Comeback Attracts Pensions as Banks Withdraw

European pension funds are piling into collateralized loan obligations (CLO) as the hunt for yielding assets remains hot.

Data from Citi published this week showed that pensions made up 26% of the investor base for European AAA-rated CLOs in the first half of 2015, second only to banks with a 33% share. Insurers made up 23% of the market.

In the US, asset managers have taken a significant share of the market as banks have reduced their activity in the CLO sector. Asset managers accounted for more than a third (35%) of the investor base for AAA-rated securities in the first six months of the year, Citi said, with banks taking 37%.

“Asset managers are catching up quickly to match up with banks’ demand of senior-most paper,” Citi analysts Ratul Roy, Maggie Wang, Andy Chen, and Joseph Walsh wrote. “Yield-starved pension funds have made an arrival into the CLO space, and seem to be here for the long haul.”

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Private debt markets have become popular among asset owners in recent years as banks have backed out of some areas of lending in order to de-risk their balance sheets. Last year the market was estimated to have hit $2 trillion.

The Citi analysts also noted that banks now had their lowest CLO market share since the peak of financial crisis.

“In the AAA primary market, for example, banks have decreased from representing 85% of the market in 2012 (the post-crisis high) to representing only 40% in 2014,” the analysts wrote. “This year was no different, with banks purchasing, proportionally, their lowest post-crisis allocation on 38% in the first half of 2015.”

In the mezzanine space, banks bought just 9% of issuance in the first half of this year, Citi’s analysts said.

Read:Citi’s Global Structured Credit Strategy report

CLO Investor Base H1 2015

Soon after declaring there are “no safe places to invest” in China to clients, Bridgewater Associates stressed that “too much has been made of the shift in their thinking.”

(Art by Nigel Buchanan)“Ray Dalio and Bridgewater believe that too much has been made of the shift in their thinking and want to clarify their thinking.”

That was the statement from the world’s largest hedge fund following leaks of a private investment note on China’s crash.

Reports began rolling in Wednesday that Bridgewater is no longer bullish on China’s economy, following the country’s most recent and dramatic stock market dive.

“Our views about China have changed,” Bridgewater’s founder Ray Dalio wrote in an internal memo, according to the Wall Street Journal. “There are now no safe places to invest.”

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The Shanghai Composite Index plummeted 32% on July 8 from its June highs, Bloomberg’s data showed. Though Chinese stocks have begun to inch back up, the Shanghai Composite still remains 22% lower than the same June peak.

“The observations that were made simply noted that falling stock prices have a negative wealth and negative psychological effect.”

The comment came as a shock as Dalio had said China’s stock market move was “not significantly reflective of, or influential on, the Chinese economy, Chinese investors, or foreign investors” as recently as earlier this month, the Journal continued.

This week, instead of viewing China’s problems as “opportunities,” Dalio warned “even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity.”

However, soon after the private comments were leaked to the media, the $169 billion hedge fund clarified its positions, saying “too much has been made of the shift in their thinking.”

A Bridgewater spokesperson told CIO Dalio’s comments “simply noted that falling stock prices have a negative wealth and negative psychological effect.”

In addition, the firm said it still believes China has the resources to manage debt and economic restructuring challenges going forward.

Bridgewater’s clarification is reproduced in full below:

While the report to Bridgewater clients is a private communication which they want to continue to try to keep private, Ray Dalio and Bridgewater believe that too much has been made of the shift in their thinking and want to clarify their thinking.

The observations that were made simply noted that falling stock prices have a negative wealth and negative psychological effect. When a classic stock market bubble (supported by unsophisticated investors buying stocks on a lot of margin) bursts, there are negative growth effects. When combined with the debt and economic restructurings underway, that will most likely result in slower growth, and more stimulative government policies to offset these downward pressures.

Bridgewater’s view that China faces debt and economic restructuring challenges, and that it has the resources and capable leaders to manage these challenges, remains the same.