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April 2022 | Issue 244

Attack-minded CLO managers capitalise on bearish outlook

Sayed Kadiri headshot
Sayed Kadiri
Some of the most aggressive CLO managers have benefited from loan market volatility in March after having tweaked their portfolios in the months beforehand.
MJX Asset Management and Zais Group have consistently assembled high-spread CLO portfolios over the years, but officials at those firms have told Creditflux they were cautious in the lead up to 2022.
Zais has historically bought loans that were unloved by many other CLO managers and this has led its CLOs to weighted average spreads more than 50 basis points above average, according to Creditflux analysis last year.
MJX has also run high-spread CLOs, but in contrast to Zais it favours highly diverse portfolios.
“Our strategy has not changed, but our view has,” says Zais senior portfolio manager Vincent Ingato. “We thought that triple C credits were overvalued this year and have been moving up the capital structure.”
“We enhanced our diversity and built par to maintain flexible portfolios”
Hans Christensen, Chief executive officer | MJX Asset Management
Ingato says last year, 40% of US new issue loans were rated either B3 or B- by S&P and Moody’s, respectively. Zais CLO 18 has been selective, however, with the CLO having less than 10% of its portfolio with issuers rated B3/B-.
Additionally, the CLO has no triple C or second lien assets. The effective date report for Zais CLO 18, which priced on 20 January, shows the warf level is 2,280. That is the second-lowest warf score among all reinvesting CLOs. It is topped only by Medalist VII CLO’s 2,268.
MJX’s 2021 CLOs had the ninth highest average WAS amongst US CLO managers at 407bp. MJX chief executive officer Hans Christensen says he believed the impact of the coronavirus would extend into 2022, with further disruptions and supply chain issues likely.
“Consequently, we improved our portfolio warfs into the 2,400 context throughout 2021 and continue this effort into 2022,” says Christensen, who is based in New York.
“We also enhanced our diversity and built par to ensure we could maintain flexible and liquid portfolios while adhering to our relative value discipline.
“As the Ukraine conflict arose, our portfolios started with a market-leading low warf and market-leading diversity, as well as being among the most attractive WAS portfolios for CLO managers.”
Creditflux data confirms this approach. Five MJX CLOs rank among the seven with the lowest warf scores.
Given that MJX and Zais tend to price their CLO liabilities wide of market averages, the aim is to target those loans that provide high spread, but are judged by rating agencies to be low risk.
Before the 2008 financial crisis, some CLO managers are known to have similarly moved up the capital structure to source assets. However, rather than pick double B loans, they allocated to investment grade bonds.
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Global credit funds & CLO's
April 2022 | Issue 244
Published in London & New York.
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