Anchorage Liquidates CLO Warehouses From BirchLane Takeover

Anchorage Capital Group has forced the liquidation of five credit lines backed by BirchLane Capital, the London-based hedge fund that got caught out by the rise in interest rates and selloff in risky assets.

(Bloomberg) — Anchorage Capital Group has forced the liquidation of five credit lines backed by BirchLane Capital, the London-based hedge fund that got caught out by the rise in interest rates and selloff in risky assets.

The move to shutter the lines of credit for future collateralized loan obligations — so-called warehouses — comes as BirchLane winds down and returns cash to its investors, according to people familiar with the matter, who aren’t authorized to speak publicly. Bloomberg reported last month that Anchorage has taken over BirchLane’s assets.

CLO managers are increasingly offloading risk from their portfolios, despite a rebound in credit markets at the start of this year, as the prospect of downgrades and more defaults looms. The warehouses BirchLane backed contained leveraged loans waiting to be repackaged into bonds of differing risk category, which would then have been sold on to investors.

The liquidated warehouses were managed by Acer Tree Investment, Angelo Gordon, Polus Capital Management, BlueBay Asset Management, and Sculptor Capital Management, the people said. Anchorage, Polus, Angelo Gordon and Sculptor declined to comment on the liquidations. The other managers didn’t immediately respond to requests for comment.

Anchorage bought some of the leveraged loans and rolled them into a seperate warehouse facility that it’s managing for BirchLane and may turn it into a CLO at a future date, the people said. As the new first-loss holder, Anchorage had the ability to call for liquidations if certain criteria were met.

Banks provide lines of credit to asset managers so that they can slowly purchase leveraged loans to build a sufficiently large portfolio, which can take months. BirchLane operated as a critical player in that process, providing a risk mitigant by taking the first chunk of losses in case the portfolio lost value before pricing as a deal. First-loss equity typically provides about a 15% buffer.

But as markets strain those holdings are posing an increasing danger to investors. More money is getting trapped in hard-to-sell assets that were acquired in pursuit of higher yields when interest rates were lower and capital was easier to come by.

European leveraged loans currently trade at around 94 cents on the euro, a rebound from last-year’s low of around 88 cents in October, according to the Morningstar European Leveraged Loan Index. The average price is still well below the 99 cent level at the start of 2022.

–With assistance from Nishant Kumar.

(Updates company comment in fourth paragraph, adds chart after second paragraph.)

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