The value of assets in Irish special purpose financial vehicles (SPVs) rose by 5 per cent during the first quarter to €944 billion, fuelled by Dublin’s International Financial Services Centre’s (IFSC) role as the European hub for repackaged corporate loans for highly-indebted companies.
US and UK private equity firms and asset managers have driven a boom in collateralised loan obligations (CLOs) vehicles in the Republic in the past seven years. These repackage pools of corporate loans into bonds that are sold to investors.
The assets in Irish-domiciled CLOs rose by 10.5 per cent over the course of the first three months to €170 billion, according to Central Bank data on SPVs, published on Wednesday. Less than €16 billon of such assets were contained in Irish CLOs at the start of 2014.
CLOs are a small but fast-growing part of the almost €5 trillion non-bank finance sector in Ireland.
They play an important role in the financing of the modern economy, allowing for the spreading of risk as companies borrow to grow. Unlike the boom-time subprime collateralised debt obligations (CDOs) that repackaged US subprime mortgages, CLOs are typically exposed to companies from different industries and of varying sizes, making widespread defaults less likely.
Loan defaults
Corporate loan defaults resulting from the Covid-19 crisis have so far turned out to be lower than anticipated as economies have been buttressed by extraordinary government and central bank stimulus.
However, the concern is that these actions have merely delayed a spike in corporate bankruptcies.
Another area of growth in SPV assets in the first quarter was in vehicles linked to investment funds. Assets in these entities rose by 7 per cent during the period, to €170.4 billion.
