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The Bank of Nova Scotia building in Toronto. The bank's move into CLOs is part of a larger U.S. investment banking expansion strategy.Nathan Denette/The Canadian Press

Bank of Nova Scotia BNS-T is expanding its U.S. credit operation by hiring a New York-based team to launch a structured loan business targeting a US$1-trillion market.

Scotiabank hired four Wall Street executives from Paris-based investment bank Natixis SA to build a U.S. collateralized loan obligation platform. The group will create securities for institutional clients backed by a pool of loans, typically non-investment grade debt. Toronto-based Scotiabank has been a significant investor in CLOs for decades and will start originating the structured products later this year.

The new Scotiabank team includes David Williams and Brad Roberts, who were co-heads of credit for Natixis in North America, alongside head of structured credit sales Sheri Koval and head of structured credit syndication Mark Dodson. Scotiabank declined to comment on the new hires because they haven’t started their jobs at the bank.

The major U.S. banks, such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., dominate the CLO market, but a number of smaller investment dealers are significant players in the sector. Natixis ranked 10th among 24 banks for new CLO issuance in 2022, creating US$3.89-billion of securities, according to a study by data service Creditflux Ltd.

Scotiabank is a major lender to U.S. businesses, which provide the loans that make up CLOs. The bank’s global loan portfolio grew by an average of 31 per cent annually over the past three years, to $123-billion at the end of October, 2022, versus 12-per-cent growth in Scotiabank’s Canadian loan portfolio over the same period.

The move into CLOs is part of a larger U.S. investment banking expansion strategy. Last year, Scotiabank hired investment bankers to cover U.S. health care, technology, industrial and consumer products companies, and scaled up a division that structures and trades corporate equity derivatives.

The CLO market has expanded rapidly over the past five years, hitting an estimated US$1.2-trillion in 2022, as institutions such as insurance companies and pension plans increased their holdings.

“Investors have increasingly become comfortable with the robustness of the structure through multiple periods of market volatility, most recently during 2020, and any lingering misplaced associations with the poor performance of subprime mortgage [securities] during the global financial crisis have faded,” said portfolio manager Pim van Schie at New York-based Neuberger Berman Group LLC in a recent report. “Most importantly, CLOs continue to consistently offer a significant yield premium over other corporate credit instruments for an equivalent credit rating.”

Scotiabank is entering the CLO market at a time when central banks are increasing rates to combat inflation, raising recession concerns. In a report, Deutsche Bank head of CLO origination Brendan Condon said the U.S. Federal Reserve’s moves to bring down inflation are “a double-edged sword for the asset class, because while higher interest rates will hit consumers and businesses, these may also prompt a significant influx of funds into CLOs as investors switch from fixed to floating rate products, something everyone wants in an inflationary environment.”