Global credit funds & CLO's
June 2020
| Issue 224
Published in London & New York.
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CLO webinar
A different kind of crisis
June 2020 | Issue 224
Panellists on Creditflux’s US CLO webinar were positive about the robustness of CLO structures and the role of cure contributions. But they warned about zombie defaults and gaming tests
There will be two default phases. The immediate one is being driven by cash liquidity at companies that were struggling before the coronavirus pandemic. The second default wave will strike with no clear catalyst. It will hit companies that do not get back to 2019 ebitda levels, making debt burdens unsustainable.
2.0 CLO structures have higher subordination below each rating band and over-collateralisation tests have higher cushions versus 1.0 CLOs. Most CLOs have a 12% senior OC cushion and even with rating downgrades at twice current levels, plus triple Cs trading at 50-60 cents on average, it is hard to trigger a senior OC test without defaults.
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“The first wave of defaults will have a liquidity catalyst, the second wave will be a ‘zombie’ default wave”
Gretchen Lam
, CLO portfolio manager | Octagon Credit Investors
CLO survivors and newcomers
Managing US CLOs across two eras
72 managers have managed CLOs before and after the financial crisis; 48 have done deals regularly and are still issuing today.
“It will be difficult to trip a senior OC test”
Amit Roy
, Head of new issue US CLOs | Goldman Sachs
“A concern from 2008-09 was manager behaviour. Maybe it returns”
Ujjaval Desai
, Head of structured products | Sound Point Capital Management
This was an issue following the financial crisis. CLOs offer managers some flexibility and you have to look out for issuers that do not follow the tests as they are written. Managers that do not focus too much on the next equity cashflow, but take a long term view, will be rewarded when they next issue a CLO.
“Payment date cure contributions are becoming more prevalent”
Rich Reilly
, Partner | DLA Piper
This entails diverting equity cashflows back to the CLO to help cure test breeches. It solves one of the problems associated with cure contributions — where is the cash going to come from? A regular cure contribution might need an equity investor to gain approval from its investors, which can take time.
Where new US managers come from
68 US CLO issuers have emerged in the past decade.
CLO webinar poll
How many CLO managers will exit the business in 2020?
How many CLOs will fail their senior OC test in 2020?
US CLO webinar had 350 viewers while streaming live
165 votes were cast in the polls.
Event sponsor
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US Private Credit
Virtual briefing sponsored by DLA Piper
Date: 2 June, 11am Eastern Time
  • How are middle market companies performing?
  • What is the long term forecast?
  • Are stronger covenants helping?
  • Register now to find out
  • Symposium ticket holders automatically registered
  • Symposium sponsorship includes this event
  • Dedicated results supplement
  • Virtual awards event
  • 17 awards presented
  • Live chat throughout
  • Symposium ticket holders automatically registered
  • Symposium sponsorship includes this event
  • Dedicated results supplement