CLO-sing time: the rise of Cayman CLO funds

Whilst fundraising activity is strong for Cayman funds with strategies focussed on sectors as varied as buyouts, distressed debt and real estate, this note looks in particular at funds seeking to offer investors exposure to CLOs. A CLO (collateralised loan obligation) is a tranched securitization backed by a diverse pool of corporate floating rate debt. The underlying assets are actively managed by portfolio managers who make decisions on behalf of the CLO entity, typically a bankruptcy remote Cayman Islands special purpose vehicle.

There have been historically low default rates in CLOs, even during the crisis which saw deals still perform credibly despite the turmoil and demonstrate the robustness of certain structural features seeking to protect investors by mitigating default risk, including limited recourse, bankruptcy remoteness and over-collateralisation. Recently, certain regulatory developments on both sides of the Atlantic have created opportunities for new market participants to create a credible investment narrative culminating in double digit performance targets. The main opportunity has come in the form of risk retention with the structures being established to satisfy the "skin in the game" requirements being placed upon asset managers, offering investment opportunities to investors with longer term investment profiles and a desire for diversification.

Objectively viewed, CLOs represent an attractive asset class and, consequently, have attracted some of the largest global managers, whose credit teams have brought to market funds offering exposure to a range of CLO investments. These funds are accompanied by private placement memoranda which work to demystify some of the more obscure terminology and allow investors to gain exposure to actively managed pools of CLOs through investment products and structures with which they are familiar. 2017 has been the year for debut managers in the CLO space. Despite the initial fears surrounding the impact of risk retention on the space, we are not only seeing previously inactive managers re-emerge but new players entering the market. These new entrants range from insurance companies to hedge funds who are bringing fresh strategies and impetus to the product.

The fund formation and structured finance teams at Walkers work closely together through the entire lifecycle of a CLO fund, from marketing and capital raising through to launch of the CLO itself. Walkers together with Walkers Fiduciary can offer the "one stop shop" service demanded by the market which includes formation of the CLO vehicles (including warehouse entities, LLC investment vehicles as well as the issuer itself), the provision of share trustee and directors services and ancillaries such as FATCA advisory work.