Dechert advised Barings on the launch of Europe’s first-ever private credit CLO which priced on November 21, 2024. While market participants have long anticipated the expansion of private credit CLOs into Europe, the plethora of currencies and jurisdictions – and a more restricted pool of assets (Europe’s private credit market is still just a third of the size of its U.S. equivalent) – has long acted as a brake on investment managers.

PC CLOs vs BSL CLOs

The broadly syndicated loan (BSL) CLO market is well established in Europe. BSL CLOs are backed by a portfolio of corporate leveraged loans that are bought from the syndicated loan market. Private credit CLOs, in contrast, package loans from the manager’s own direct-lending portfolio. The incentives for a manager to establish a BSL CLO differ from those for establishing a private credit CLO. Broadly speaking, a BSL CLO is a management-fee focused business, and a private credit CLO is an alternate source of funding for the manager’s direct lending business.

In the United States, where Dechert has acted as manager’s counsel on more private credit CLOs than any other law firm, the market for private credit CLOs has reached some US$300 billion in value.

Deal details

The Barings CLO, valued at €380 million, was backed by a portfolio of European middle-market loans and rated by S&P and Fitch. As middle-market loans are typically unrated, Barings had to obtain ratings for each underlying loan. The final handpicked portfolio consisted of approximately 50 high-quality and diversified euro-denominated middle-market loans from obligors in eight countries.

Instead of the managed CLO format, a more common product type in which the underlying assets can be bought and sold over a certain reinvestment period, Barings opted for a static CLO format, where trading of the underlying assets is not permitted (other than in very limited circumstances). To enhance portfolio diversification, the deal also included a bucket of European BSLs.

Future expectations

It is widely expected that the Barings CLO will open the gates for other, similar deals. Senior figures at Barings have publicly discussed their intention to replicate this transaction, and other managers have already contacted Dechert to explore similar opportunities. It is therefore highly likely that we will see more private credit CLOs in Europe in 2025. The question remains: how many?