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News in brief

April 2022 | Issue 244
CLO funds post first negative month since outbreak of covid
Funds that invest in CLOs took a hammering in February, underperforming all parts of the credit market in the immediate aftermath of Russia’s invasion of Ukraine.
83% of funds in our database posted negative returns in February, with CLO funds bringing up the rear, losing 2.68%, according to the Creditflux CLO hedge fund indices.
The fund of hedge fund category was the only category to make gains in the month. It moved up 1.87%.
Areca Value Discovery Fund topped the tables after gaining 2.66% thanks to its portfolio of market neutral credit funds.
Moving into March, the credit indices bounced back and the loan market followed.
Managers debate ethics of investments in arms makers
The armaments industry has for a long time been negatively perceived by CLO managers and investors alike. But Russia’s invasion of Ukraine has sparked debate on the subject.
At Creditflux’s US CLO Investor Summit last month, Ronni Neeman, global head of CLO research for PGIM, said there had been several conversations around the ESG status of some companies changing.
“Certain credits and industries that were disfavoured previously maybe aren’t as bad as previously thought,” he said on a panel. “One industry that was viewed especially negatively was weapons and defence, but now there are questions about whether weapons and defence are necessary to defend human rights. I don’t know if there are any answers on that, but we’ve definitely been hearing more questions.”
Michael Curtis, head of private credit strategies at Fidelity International, agrees that Russia’s war in Ukraine has raised complex sustainability and ethical issues for companies and investors alike.
“Recent events have sparked a debate about the eligibility of defence spending to be classified as a sustainable economic activity,” says London-based Curtis. “If conventional weapons used for defence are moved off restricted lists, it is not a given that they would be included in ESG funds. Moreover, it is unlikely they will be included in the international and national green or social taxonomies that underpin ESG fund classification.”

Asset managers are likely to have close dialogue with clients to determine whether any kind of allocation is appropriate, or if there are limits on the scope for ESG investment in this area, he says.
Accunia seeks diversification with Euro CLO equity fund
Accunia Credit Management’s first fund geared predominantly to secondary European CLO equity has been launched with a view to ensuring better diversification across managers and vintages, according to portfolio manager Christian Grane.
He says that a secondary CLO equity fund also enables Accunia to pick up assets when market conditions are favourable.
As reported by Creditflux last month, the fund is known as the King’s Garden fund. It is named after a park in Copenhagen, where Accunia is based.
Officials at the firm say they will target CLO equity from managers with a track record of maintaining collateral value during market downturns. They will also look for solid risk retention capital backing and a proven ability to reset and refinance CLOs to enhance equity returns.
Jacob Jensen, chief business officer at Accunia, says: “Accunia has made opportunistic investments in CLO equity since the onset of the 2.0 era. The King’s Garden fund offers our investors a dedicated strategy in this attractive asset class.”
King’s Garden adds to Accunia’s CLO fund range: Accunia European CLO Investment Grade and Accunia European CLO Opportunity, launched in September 2017, and Accunia CLO AAA/AA, which launched in 2020. The first two funds’ DKK-denominated A share class have returned 1.47% and 4.25% annualised since inception, respectively, according to Creditflux’s hedge fund database.
CBAM CLO debt comes into play with reset incentive
Carlyle Group’s acquisition of CBAM for roughly $787 million ($615 million in cash) has underlined that we are in a seller’s market, sources say.
But a key part of that deal will be the ability to extend CBAM CLOs through resets. This, in turn, could make CBAM’s CLO debt attractive in the secondary market.
CBAM’s $15 billion of assets were centred mainly on CLOs ($12 billion) and these could be particularly lucrative because they are among the few in the market to charge the full 50 basis point management fee. This alone should generate $60 million in fees annually.
Nevertheless, sources say there will be pressure to reset the CBAM CLOs, although one roadblock could be the sheer size of some of the deals. Six total roughly $1 billion each.
As CBAM was a relatively young manager, debuting in 2017, much of its CLO business consisted of new issues (15 US CLOs). But last year the firm extended the life of four CLOs.
Eldridge, CBAM’s backer, has retained majority equity in 12 of the US CLOs.
CLOs land in Jersey as Maples kicks off continuations
The CLO migration from the Cayman Islands to Jersey is in full swing, with the Maples Group’s global CLO team having incorporated 27 new Jersey CLOs and completed nine continuations of Cayman CLOs into Jersey. Another 18 continuations are in its pipeline.
This comes after the EU placed the Cayman Islands on its anti-money laundering blacklist in February.
Scott Macdonald, global head of the finance team at Maples & Calder, the Maples Group’s law firm, says that the initial spate of continuations into Jersey have consisted of CLO warehouses.
“New CLOs are also being incorporated in Jersey and we expect to see legacy EU risk retention CLOs move over when the time comes to refinance and reset these.”
The move from the Cayman Islands to Jersey takes the form of a continuation, whereby an overseas legal entity migrates to another jurisdiction.
Although Bermuda had been touted as an option for CLO issuers, Macdonald says that Jersey is better known as a securitisation jurisdiction that has historically catered for the swift incorporations required by the market.
“Bermuda is better known as an insurance jurisdiction. It has a multi-stage incorporation process, whereas Jersey is known for its speed of execution,” he says. “Jersey was already home to a few US CLOs and has also been used in the past for synthetic securitisations.”
StepStone sets out new path with Mexican securitisation
StepStone Group says its securitisation of private credit opportunities for Mexican investors has left a template for other managers to follow.
StepStone’s strategy allows Mexican insurers to efficiently invest in US direct lending loans, but the structure of the deal suggests similar vehicles could invest in other types of credit assets.
Managing director Alberto Basave says that StepStone sought to bridge the gap between Mexican insurers and the US asset management industry and found a securitisation was the best way to achieve this. Initially, the plan was to create a structured vehicle with underlying private equity assets, but the firm settled on private debt (with defined cashflows) as a better fit.
“The structure we created had to have a local triple A rating to appeal to Mexican insurers,” says Basave. HR Ratings de Mexico notes that the local AAA rating is equivalent to its global BBB+.
As Creditflux reported, the $102.5 million securitisation is listed on Mexico’s BIVA Stock Exchange. The securities carry a coupon of Libor plus 225 basis points.
The structure resembles a CLO, although it consists of only one tranche (with no underlying equity) and is backed by middle market loans.
“We have a creative structure, which has an over-collateralisation component as we issue the bonds at 105 and use that 5% principal as a buffer,” says Basave. “Excess interest and loan amortisations can be reinvested, which means the OC cushion stands to rise.
“It was like putting together a puzzle. But now that it is in place, others will be able to use it as a template.”
Credit indices show central bank-led swing potential
Macro credit trading in March was overwhelmingly about the consequences of Russia’s invasion of Ukraine, but the pendulum is swinging back to central bank policy.
The US Federal Reserve has come back sharply into focus in the run-up to its 3-4 May meeting after vice chair Lael Brainard warned on 5 April that she expects rapid tapering of asset purchases in tandem with a programme of rate hikes to curb inflation. Focus on the Fed was a cause of US underperformance versus Europe at the start of this year, before the war took over as dominant driver.
“It was commonplace to say ‘don’t fight the Fed’ when the narrative was quantitative easing and low rates in perpetuity,” says one New York-based credit fund manager. “But this will also be the case going the other way. I’m not sure how well that is understood, and it also applies to Europe.”
Credit indices went on a wild ride in the first half of March, with European spreads particularly impacted by financial market fallout from the war. But by the end of the month they had staged a remarkable recovery to pre-invasion levels — despite the conflict’s ever-mounting humanitarian and economic toll.
“The macro backdrop of geopolitical crisis plus the potential for central bank hikes may look priced in, but are people set up for that in the way they should be?” warned Kelley Baum, head of credit derivatives at III Capital, at Creditflux’s Credit Dimensions event in New York on 31 March.
“There’s a lot of risk for potential gapping in the credit markets, so focus on having positive convexity in your trades and whether there might be another large macro move before defaults or dispersion.”
Pipeline planning drives rise in captive CLO equity funds
There’s never been a better time to raise CLO captive funds. That’s according to Credit Suisse’s head of CLO new issues Brad Larson, who spoke about the benefits of such funds at Creditflux’s CLO Investors Summit in New York last month.
His comment comes as several CLO managers — including Barrow Hanley, Nuveen and Post Advisory — all held final closes in the month.
“Equity is typically the hardest part of the capital structure to raise from an arranger’s perspective,” said Larson at the event on 29 March. “To have a manager show up with 49-50% of the equity done allows both the manager and arranger to plan pipelines a little better. There’s no doubt that’s driven some of the increased issuance.”
John Timperio, partner at Dechert, added that his firm had structured several of these funds. “They come in two flavours. One is opportunistic, the other facilitates EU compliance. In this market, having the ability to do an EU-compliant deal for US managers is very helpful and we are certainly seeing a lot of interest in those structures.”
While the performance of risk retention funds may have been slightly underwhelming, performance in the latest CLO funds, amid volatility over the past few years, has been good. Adding this to the “number of positive articles written about CLOs”, there’s “never been a better time to raise”, said Larson.
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Global credit funds & CLO's
April 2022 | Issue 244
Published in London & New York.
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