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April 2023 | Issue 253
News
News in brief
News in brief
Banking volatility seen as opportunity for CLO managers
The CLO investor community gathered in New York in March to discuss the best strategies for managing through the volatility stemming from the regional banking crisis.
Som Mukherjee, senior partner and head of investments at Lakemore Partners, said that today feels like a “controlled recessionary environment” that allows managers insight into the stressed parts of their portfolio.
“We really like new issue CLOs in this kind of environment because if you’re building a new portfolio you have the ability to pick credits that are not exposed to those stresses,” Mukherjee said.
Batur Bicer, managing director at Napier Park Global, said the volatility had improved the conditions for new CLO formation. “The volatility brought loan prices down,” Bicer said. “Now the focus is on ramping warehouses and getting loans at cheaper prices.”
With distress levels in the loan market rising, and with this set to continue, participants discussed the risk of “creditor on creditor violence”.
Shawn Lim, vice president at Vibrant Capital Partners, said documentation trends that allow CLOs to participate in restructurings began influencing the direction of the loan market in 2019.
“If you’re seeing a negative news event around a specific credit, its not uncommon to see a 20% price drop for a loan,” Lim said. “That’s because loan investors know what kind of tricks can be pulled. For CLO managers the thought process has become ‘Go big or go home’ — they’re not doubling down on distressed names but evaluating whether they have the ability to get a seat at the table to negotiate a better outcome for the recovery.”
Defaults rise yet fears of low recoveries hurt even more
Defaults and Chapter 11 filings are picking up this year amid tougher economic conditions for borrowers.
Year to date, $3.7 billion of loans in CLOs have defaulted, according to Bank of America research, the same amount that defaulted in all of last year.
Diamond Sports and Loyalty Ventures are the two most recent companies that CLOs have exposure to, which have filed for bankruptcy. The pair filed in March and joined Avaya, Heritage Power and Serta Simmons from earlier in the year.
CLOs had an exposure of $1.6 billion to Diamond Sports at the time of its default, BofA research said in a report published on 31 March.
Speaking at Creditflux’s CLO Investor Summit last month, Lyuba Petrova, senior director at Fitch Ratings, stated that, this year, leveraged loan default volumes have increased to around $14.5 billion. This is compared to just over $4 billion in the same period last year.
However, it is not just the probability of defaults that make CLO managers and investors wary. The increase in cov-lite loans means lenders have left themselves open to be ‘primed’ in the last couple of years, and this is now coming to the fore.
Sources say the average recovery rate for defaults has declined considerably. In the past, the recovery rate on defaulted loans was 70-80%, but that has now been flipped to the loss rate. Some non-participants in a bankruptcy can be left with 10% or less.
Petrova: ‘leveraged loan defaults have risen to around $14.5 billion’
New CLO investing book to hit stores next month
A CLO industry veteran has written a book on investing in the asset class that is due to go on sale with major retailers next month. Shiloh Bates, managing director at Flat Rock Global, wrote the 250-page tome,
Collateralised Loan Obligation (CLO) Equity and BB Notes, in the hope it will demystify the product to prospective investors.
“If you ever find yourself marketing a CLO equity fund, a big part of the sales process is educating people on the asset class,” he says.
“Even top executives at major CLO investment firms spend large parts of their day explaining to people what a CLO is.”
The book covers explanatory topics, such as an introduction to leveraged loans and an explainer on various CLO counterparties, as well as specialist knowledge, such as the role of fixed-rate tranches in a CLO structure, or the use of fee rebate letters.
“I didn’t include every trick in the book — we want to keep some of our trade secrets under the hood — but a lot of people could read it and become a value-add in a CLO investing role pretty quickly,” Bates says.
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Global credit funds & CLO's
April 2023 | Issue 253
Published in London & New York.
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