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March 2021 | Issue 232
Sponsored by Moody’s Analytics
Answering the “what if?” question
Tom Davidson
CLOs can be complex, and efficiently calculating trading scenarios even more complex. But new tools are available to help managers quickly model hypothetical scenarios
Until very recently it could take a CLO manager several days to calculate portfolio impact based on hypothetical trading scenarios, a time-frame that just doesn’t work in a crisis. 2020 has underlined how quickly opportunities open and close in the credit markets.
A second challenge for CLO managers is the sudden need to stress-test a far wider variety of “what-if” scenarios as they try and mitigate the risk of covid-related distress.
Clever use of technology can help with both these problems, and thankfully the market has mostly moved on from buying or selling a loan in one or more CLOs, generating compliance results, and making trading decisions with Excel macros. But the replacement proprietary hypothetical trading solutions many CLO managers have created are often inefficient, and difficult to scale as a manager grows and the need to analyse trades across a portfolio rather than for individual CLOs grows with them.
Finding technologically gifted developers who also understand how CLOs work can be a bottleneck in adapting existing solutions. For larger managers the problem is normally one of inefficient legacy systems. There is often a lack of a centralised view across source data systems, as well as challenges in supporting and maintaining a variety of installed products.
Technology vendors such as Moody’s Analytics have started to step in with their own solutions. The firm’s new CLO Manager Module is a cloud-based infrastructure to support portfolio scalability and performance. Moody’s Analytics is, of course, no newcomer to CLO metrics, with a long-standing suite of tools for managers and investors to explore enhanced metrics, compare deals and managers, and calculate cash flows. Its new module is the result of a collaboration with PGIM’s fixed income team to tackle the issue of technological efficiency around hypothetical trading.
“The platform works for both the front office and the back office”
Kenneth Ho, Senior director | Moody’s Analytics
Moody’s Analytics’ approach is built on taking a CLO manager’s collateral data (and any other supplemental data) and calculating compliance for concentration, coverage and quality test results. The metrics are then presented on a cloud-based user interface, the CLO Manager Module, that enables portfolio managers and middle office teams to quickly access the hypothetical impact to the portfolio and cash-related activity.
“We wanted to design a platform that works for the front, middle and back office,” says Kenneth Ho, a senior director at Moody’s Analytics. “Because of that the module is a full end-to-end solution from origination through reconciliation.”
The module is designed to analyse trading impacts on the whole portfolio of a CLO manager, rather than on a CLO-by-CLO basis.
“The CLO Manager Module has been a game changer for hypothetical trade testing”
Bent Hoyer | PGIM
This approach seems to be working well for PGIM Fixed Income. According to Bent Hoyer, who works on the Dryden CLO platform: “We collaborated with Moody’s Analytics to examine the complexities of CLO portfolio management and share insights around the needs of CLO managers broadly. For us, the resulting CLO Manager Module has been a game changer for hypothetical trade testing. The drill-down capability into specific tests, coupled with platform-wide reporting functionality, has substantially improved our trade testing metrics and increased data accessibility.”
Of course, any analysis is only as robust as the data going in, and that has always been a struggle in the loan market. Despite continued work by the LSTA, among others, loan trading and settlement remain slow and prone to error.
An important focus for Moody’s Analytics has been to make the CLO Manager Module easy to use for robust reconciliation and data reporting. The next development in the pipeline will focus on expanding the product’s existing trustee reconciliation capabilities, allowing CLO managers to benchmark directly with trustees on a single cloud-based platform on a daily basis.
The continued development of technological solutions by experienced vendors should make the lives of CLO managers a little easier, and the returns of investors a little safer as CLO trading becomes less of an art and more of a science.
About Moody’s Analytics
Moody’s Analytics provides financial intelligence and analytical tools supporting our clients’ growth, efficiency and risk management objectives.
The combination of our unparalleled expertise in risk, expansive information resources, and innovative application of technology, helps today’s business leaders confidently navigate an evolving marketplace.
We are recognized for our industry-leading solutions, comprising research, data, software and professional services, assembled to deliver a seamless customer experience.
Thousands of organizations worldwide have made us their trusted partner because of our uncompromising commitment to quality, client service, and integrity.
Moody’s Analytics is a subsidiary of Moody’s Corporation (NYSE: MCO). MCO reported revenue of $4.2 billion in 2017, employs approximately 11,900 people worldwide and maintains a presence in 41 countries.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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