Blackstone Inc. is developing a CLO that mixes broadly syndicated loans with private credit, according to people familiar with the matter, pairing the higher yields of direct lending with the depth of the leveraged loan market. The structure, which allows managers to shift the portfolio between the two asset classes, was pioneered by Sona Asset Management when it printed the first hybrid CLO from either side of the Atlantic at the end of last month.

Typically, collateralized loan obligations bundle mainly leveraged loans, alongside a small allocation of high-yield bonds, into securities offering varying levels of risk and return. As direct lending has swollen in size, managers in the US have priced over 300 private credit CLOs, worth around $161 billion. Europe, however, has only seen five of such vehicles, according to data compiled by Bloomberg.

The hybrid model allows some European managers, who may lack the scale and diversification of their US counterparts, to build out their portfolios with readily accessible syndicated loans, then add higher-spread private loans as they source them. Blackstone ranks as second and third most active CLO manager in the US and Europe respectively, with $10.7 billion and €3.3 billion ($3.8 billion) of CLO paper printed this year, according to Bloomberg League tables.

A spokesperson for Blackstone declined to comment. The Sona Aclai I contains 85 loans from the broadly syndicated market and 20 from private credit, according to data compiled by Bloomberg. The manager plans to use the flexibility to move between the two asset classes as market needs dictate, with documentation allowing as much as 80% of the vehicle to be invested in private credit assets.

"We just want to go where the best opportunities are," said Jacob Walton, Co-Head of European CLOs at Sona Asset Management. The weighted average spread on a European CLO of broadly syndicated loans stands at approximately 3.6%, while the Aclai CLO I priced at 4.44%. Standalone private credit CLOs generate even higher returns, with Ares' second direct lending CLO yielding 5.67%.