SCI MM CLO Awards: Service Provider of the Year

SCI MM CLO Awards: Service Provider of the Year

Friday 25 November 2022 17:06 London/ 12.06 New York/ 01.06 (+ 1 day) Tokyo

Winner: U.S. Bank

U.S. Bank doesn’t merely have a narrow lead over its chief competitors in the provision of custody and trust services to middle market CLO managers: it has opened up a yawning gulf. For the 12 months ending September 30 2022 U.S. Bank claims a 60.9% market share.

The bank has been prominent in this business since the MM CLO market began really taking off in 2017, and its market share has not dropped below 50% since then. Moreover, it has been dealing with the underlying asset class – middle market loans – around 15 years.

U.S. Bank’s eminence is due to a number of factors. In a business like corporate trust and custody, experience and history count for a lot. The parent institution, US Bancorp, is the fifth largest bank in the country. It operates under the second-oldest continuous national charter, granted in 1863, and has assets of close to $575bn. It is considered a systemically important bank by the Financial Stability Board.

This pedigree is important, and the bank’s management has made it clear that it is considers the provision of CLO services to be central to the model. “U.S. Bank has made a significant commitment to this business over the years, in people and in technology. It is supported at the highest levels of the bank. It is part of wealth management and investment services, one of the core revenue-generating businesses lines, and we’ve made a significant number of acquisitions in this space over the last 30 years,” says Joe Nardi, US CLO business head.

Indeed, U.S. Bank global corporate trust and custody business has bolstered its operations by no less than 26 significant acquisitions in the last 30 years, dating back to 2Q 1992. For example, at the beginning of 2021, US Bancorp bought MUFG Union Bank for $8bn, gaining the debt servicing and securities custody services alongside an additional 190,000 small business customers.

The CLO custody business remains generally labour intensive. However, U.S. Bank’s scale has allowed it to invest heavily in automated processes and this means it can devote more scale and staff resources to the middle market CLO custody business – which is even more labour intensive. “We’ve been able to shift resources to this asset class. There is a lot of picking up the phone, punching in numbers and chasing people about where this or that wire transaction went,” says David Keys, head of CDO relationship management. Some 800 staff is currently employed in the overall CLO business.

The firm operates a third-party vendor platform from Deloitte for trustee services and custodianship, but has it has been customised to suit the specific needs of U.S. Bank in the MM CLO business. “Our continuous investment in technology sets us apart,” says Nardi.

Of course, all manner of whizzy technology counts for naught without experienced staff. This is a complex business, and the firm has acquired and kept people that understand it. This also means that the barriers to entry are high; it is difficult to imagine a competitor dethroning U.S. Bank without equivalent levels of expertise and knowledge.

It got it into MM CLOs at the same time its clients did, and the business has developed as the market has developed. “We want to serve our global clients and as they evolved with the market, we wanted to make sure we could partner with them. As they developed the middle market space, we grew with them,” explains Keys.

There is no typical U.S. Bank MM CLO client, he adds. “The roster spans from the largest established managers to the small niche players that only play in the middle market space.”

The experience and understanding it had of the overall CLO market was an invaluable underpinning of its development of the middle market business. It already knew how to manage loans and it applied this, with requisite tweaks and adjustments, to this new area. The firm has been in the MM CLO space for as long as there has been a MM CLO space.

“We’ve been at the forefront of this market from the beginning. What made us successful in the overall market has made us successful in the middle market area,” says Nardi.

Its scale also allows it to be competitive with fees. Although fees have stabilised in the last year or two, there has been gradual fee compression from the earliest days of the market and U.S. Bank’s size and sophistication means that it can offer competitive rates. If it did not, it would not be able to maintain such a lead over its rivals.

Despite the seismic shifts in the global economy which have become apparent in the past year, the performance of the MM CLO business has been surprisingly robust and issue pipeline appears impressive.

“We’re in a period of disruption right now, but we expect activity to pick up again in 2023,” concludes Nardi.

For the full list of winners in this year’s SCI Middle Market CLO Awards click here.