Early groundwork is taking place to allow collateralised loan obligation (CLO) structures in the Gulf Cooperation Council (GCC) region, according to market participants polled by Debtwire at Abu Dhabi Finance Week (ADFW).

The structures have so far been associated with North America, and more recently Europe, and while GCC capital has invested, there have not so far been regional CLOs, said asset and investment managers at the event, which took place in the capital in the United Arab Emirates (UAE) this week.

CLOs are not currently used as an investment structure in the region, but ratings agencies have begun looking at rating loans in the region, which could mean that CLOs associated with some asset classes are possible within five years, said Lawrence Golub, CEO and founder of Golub Capital.

He gave auto loans as an example of the loans with which CLOs in the region could be associated.

“Many of the banks and institutions here [in the GCC] do invest in the AAA tranches of CLOs – US CLOs and European CLOs. And we have investors here. We don’t service them through the local office, but, there are actually quite a large amount of investments in the investment grade debt tranche CLOs in the region,” Golub told Debtwire in an interview during ADFW.

Banks in the UAE are “very well capitalised” according to Golub, and while Saudi Arabian banks may also be “perfectly well capitalised”, banks in the Kingdom have lent a lot of money as a ratio for their deposits, he added.

By international standards, this leaves them with a less conservative liquidity profile than banks now target, he said.

“It’s hard to say, but a CLO is a way for a bank to take assets off of its balance sheet and free up liquidity, once a market develops, especially for the AAA securities,” Golub said.

It is likely that the region will see GCC based CLOs in the coming years, said another investment manager familiar with the matter, as banks look to move loans off their balance sheets.

Investors are looking to CLOs because returns in other asset classes, such as private credit, are currently lower than they have been previously, said the investment manager.

“Anyone looking for a double-digit return profile in credit is hard pressed to find it now in private credit,” he said. “That’s been the news, that unless you’re levering up your private credit, you’re not going to be able to get double digit return.”

CLOs are a means of navigating market uncertainty for Himani Trivedi, head of structured credit, at Nuveen.

“There’s just so much uncertainty right now going forward, particularly with the AI disruption, that you are supposed to be in a situation where you can reposition your portfolio. When you are in a direct lending or a long-term investment that you can’t really trade, it’s very hard to do that,” she said.

A broadly syndicated loan portfolio allows positioning and repositioning of portfolios, she said, adding that it was an interesting perspective to think of CLOs as more of an actively managed strategy, rather than just a levered product.

First Brands fallout 

The fallout from the collapse of First Brands, to which CLOs were exposed, was another key topic of ADFW.

Nuveen passed on the First Brands loan because it received insufficient information, meaning its due diligence standards couldn’t be met, Trivedi said.

However, while the collapse comes up regularly in discussions around CLOs, she pointed out that the First Brands loans were valued at USD 2bn-USD 2.5bn out of a CLO market of USD 1.4tn.

Even for CLO managers that had the exposure, on average the exposure was around 20bps on the portfolio, she added, and by construction CLOs are very diversified, with 200 to 250 issuers per CLO.

“We have seen situations like that multiple times over the years. When you have a default like that, it doesn’t reduce the distribution to CLO equity. So, every quarter, even if you have defaults in a portfolio, the distribution to CLO equity continues.”

Around 70% of broadly syndicated loans (BSLs) are currently trading above par, a dynamic last observed earlier this year, driven by CLOs absorbing roughly 75%-80% of new loan issuance, said Volkan Kurtas, Founder of Vibrant Capital Partners, at a panel discussion at the ADFW Private Credit Summit on Tuesday.

Recent US liability-management transactions, including the collapsed First Brands and Tricolor, which filed for Chapter 7 bankruptcy in the USA in September, have intensified scrutiny of weaker syndicated documentation that may allow value leakage away from existing lenders.

Although these events involved BSLs rather than private credit loans, Kurtas noted that the headline risk has influenced broader sentiment across the market.

However, it is not fair to read across from First Brands and Tricolor to those in traditional private credit, said Justin Muzinich, CEO of Muzinich & Co during a panel.

“Basically there is fraud in both of them. Unless your thesis is fraud is widely spread in private credit, I don’t think they are particularly instructive,” Muzinich added on the panel.

What next for private credit? 

Private credit managers are positioning for a more active deployment environment next year, driven by a combination of falling base rates, renewed M&A pipelines and the turnover of the 2021-2022 deal vintages, said other market participants at the Private Credit Summit.

The views of the managers echo Debtwire’s CEEMEA Private Credit Outlook 2026, which sees private credit evolving in the Middle East and Central and Eastern Europe, and building momentum in Africa.

The “boom-year vintage” of 2021-2022 is expected to rotate through asset sales, continuation vehicles and refinancing events as maturities approach, said Joe Knight, managing director in Barings’ European Private Credit business.

Many of these companies have grown in size and now sit at the upper end of private credit’s remit, increasing the likelihood of overlap with syndicated markets.

Knight said managers will need capital ready to defend incumbency on well-performing assets, while also triaging weaker names now “coming current”.

Declining interest rates should support a pick-up in M&A activity, which would strengthen direct lending volumes, especially in acquisition finance, said Miguel Toney, executive committee member in CVC’s private credit team.

Limited partners (LPs) remain focused on capital preservation and loss avoidance, and that manager differentiation is expected to widen next year as underwriting discipline becomes more visible, Toney added, continuing that the firm is “very bullish on structured equity and preferred equity” for 2026.

It is important to be honest about private credit and admit that markets are a lot more crowded than they were a decade ago, said Muzinich on the panel. “There’s a lot more capital chasing deals and spreads are lower. That’s the backdrop for private credit. My sense is, down the middle, upper mid-market, core mid-market private credit, returns are going to be lower than they have been historically because the market is more crowded,” he added.