NordLB Pushes Into Fund Finance and CLOs to Rebuild Its Capital Markets Arm

NordLB, the state-owned German lender based in Hannover, is trying to carve out a bigger role in the machinery of modern capital markets. The bank wants to expand its lending to third-party investment funds and to move deeper into packaging loans that are then sold on to investors, two businesses that have grown rapidly across Europe as banks look for ways to earn more from arranging credit rather than simply holding it.

The strategy is being driven by Andreas Feiner, the bank's new head of capital markets, who has set out plans to build up so-called subscription lines in fund finance and to structure collateralised loan obligations. For an institution best known for plain corporate and regional lending, the shift marks a deliberate step toward the more fee-driven, market-facing side of banking.

What the bank is actually building

The two targets sit at different ends of the credit business but share a logic. Fund finance, and in particular subscription lines, means lending to investment funds against the money their backers have committed but not yet paid in. It is a lower-risk, capital-light form of lending that has become a favourite of banks wanting steady returns from professional clients, and demand for it has climbed as private capital has swelled.

Collateralised loan obligations are a different animal. They bundle together large numbers of corporate loans and slice them into tranches that carry different levels of risk and reward, which are then sold to investors according to their appetite. For a bank, structuring these vehicles generates fees and frees up balance sheet capacity, but it also demands real expertise and pulls the lender closer to the engine room of the leveraged loan market.

A push beyond traditional lending

Taken together, the moves are about widening where NordLB makes its money. Relying on the interest margin from ordinary loans leaves a bank exposed to thin spreads and to whatever downturn hits its home market. Building capital markets muscle, by contrast, offers income from arranging, structuring and distributing credit, a stream that can hold up even when balance sheet lending slows.

It also places NordLB in competition with far larger investment banks that have long dominated fund finance and CLO structuring. Winning a share of that business will require the bank to convince fund managers and investors that a mid-sized regional lender can execute with the same reliability as the global players, a test of both its people and its systems.

From near collapse to reinvention

The ambition is striking given where the bank stood only a few years ago. NordLB was pushed to the brink by a mountain of bad shipping loans, and in 2016 it reported a loss of close to two billion euros after setting aside heavy provisions against that soured debt. The damage was severe enough to require a rescue by its public owners rather than a slow recovery on its own.

In early 2019 the bank's backers stepped in to fill a capital hole of around three and a half billion euros. The federal state of Lower Saxony put up cash and balance sheet support, Saxony-Anhalt added a smaller contribution, and the German savings banks association chipped in more than a billion euros. NordLB is majority owned by those two states, with regional savings banks holding a minority stake, and the rescue came with a mandate to shrink, de-risk and refocus.

The wager ahead

Seen against that history, the expansion into fund finance and CLOs reads as the next phase of a turnaround, a move from survival toward a more durable business model. Having cut back its riskiest exposures, the bank is now looking for growth in areas that promise fees and capital efficiency rather than the concentrated bets that once nearly sank it.

Whether the strategy pays off will depend on timing and execution, in a market where credit conditions can turn quickly and competition is fierce. What is clear is the direction NordLB has chosen. A lender once defined by its troubles is trying to redefine itself around the plumbing of institutional credit, betting that the future lies in arranging money for others as much as lending its own.