News in brief

August 2021 | Issue 237
CLO funds defy soft market to deliver yet again
Corporate credit rallied in the second quarter, while CLO spreads dripped wider — but that hasn’t stopped CLO funds outperforming yet again. Four of the top 10 funds in our credit hedge fund rankings belong to the CLO category, with Hildene Credit Fund finishing in second place with 3.84% gains. The CLO fund was also second in May after gaining 3.29%. This lifts its year-to-date returns to 21.62%.
CLO strategies managed by CIFC Asset Management and Lupus Alpha also make the top 10. However, the best performing fund at the halfway stage of 2021 is a high yield offering. Wasserstein Debt Opportunities Fund has notched up 35.41% year to date.
Coronavirus delta dilemma puts reflation trades into reverse
Concern over the covid-19 delta variant dented investor optimism in July and looks set to hold back credit spread improvement in August, as focus turns to rising cases in the US and Germany.
A steep increase in US new covid cases, from less than 16,000 a day to nearly 109,000 on 27 July, has dampened hopes for reopening trades in the country, as well as raising uncertainty over government support measures.
“We are in the camp that thinks inflation will be transitory, although supply chain disruption is resurfacing as a threat,” says one US buyside trader. “Other than perhaps hotel price rises, core inflation has not gone beyond what the Fed wants, but the delta variant could produce additional headwinds for credit markets.”
US high yield index CDX HY reached a post-2007 tight of 269.25 basis points on 2 July, but has since navigated close to 300bp. Meanwhile, CDX IG traded up from 46.75bp to 52bp, although it had improved to 50bp at time of press.
US CLO managers have embraced this volatility (see ‘Credit investors seek alpha as delta variant creates volatility’). But while some countries are on high alert over the delta variant, UK cases had dropped for seven days straight at time of press.
Investors in the country took this fall as a signal for rotation back into reopening trades, while strategists warned that markets could be too fixated on the delta variant.
“The roll-out of vaccination programmes has significantly reduced the risk that healthcare systems become overburdened in developed market regions,” wrote JP Morgan strategists in a recent note.
CLO ETF manager eyes up insurance partnerships
Alternative Access Funds plans to expand its CLO exchange traded fund just under a year after launching its initial offering, officials at the firm tell Creditflux.
Alternative Access was one of two firms to launch an ETF focused on investing in CLO triple A tranches alongside Janus Henderson. It is now exploring options to build momentum for AAF First Priority CLO Bond ETF in terms of asset sourcing and marketing.
Peter Coppa, founder of Alternative Access Funds, says one way the firm is looking to expand the ETF is through partnering with insurance companies.
“Insurers have a lot of implied leverage on their books and we have an NAIC 1 designation. This means that if an insurance company held the ETF on their balance sheet, they would have the same risk base capital charge as they held for the underlying cusips,” he says.
Other options would be to partner with a giant ETF issuer, such as BlackRock, or through a combination of insurance and wealth advisory firms.
As of 26 July, AAF CLO ETF had around $10 million in net assets and was trading at $25.08. The ETF is listed on the New York Stock Exchange.
The weighted average spread on the underlying assets is 103.9 basis points, reflecting the fact that the ETF has exposure to short tenor paper.
Pemberton seeks partners for private debt strategies
Pemberton Asset Management is seeking to build long-term private debt partnerships with wealth and asset managers through its Pemberton Wealth & Asset Management Solutions initiative.
Michele Baldessarini, executive director in Pemberton’s business development team, says the initiative was set up in response to interest from wealth managers in the asset class. Pemberton is in discussions with several potential partners.
“European private debt is attractive to wealth managers from a risk/return perspective. It offers the opportunity to steadily generate returns over the long term with a significant pick up from more traditional fixed income,” he says.
“But there is currently poor access for wealth managers to invest directly into the asset class — it’s difficult to build the infrastructure needed to properly originate, analyse and manage private debt investments.”
The coronavirus pandemic was the first big test for European direct lending and Baldessarini says the asset class has proven it has even higher resilience to a crisis than fixed income.
China teaches tough lessons to foreign investors
China’s regulatory crackdown on some of its fastest-growing industries created shockwaves that have reverberated widely, dragging on US and European credit at the end of July.
China has hit private education with bans on companies being for-profit, pursuing IPOs, or taking foreign capital. This is of huge concern for private equity houses that have invested in the sector, but adds to China’s curbs on technology companies since late 2020 as well as its step-up in attacks on cryptocurrencies from May.
It also comes as US/China trade tensions are on the rise. Deepening investor pessimism about the outlook for the US-China relationship has been frequent in recent bank strategy reports.
“Various large multinational companies have operations in China, so the country has provided uncertainty to the extent its rules are changing,” says one US credit investor. “This could have some impact on flows, knocking on from the effect on equities.”
On Monday 26 and Tuesday 27 July, the Nasdaq Golden Dragon China Index, which follows the 98 biggest US-listed Chinese stocks, registered its biggest two-day fall in value (15%) since 2008.
But the iTraxx Asia Ex-Japan index, already an underperforming index, added 2bp on the Monday before gapping 4.75bp wider to 92.75bp the next day, according to IHS Markit. This is its riskiest level since mid-June 2020. During these sessions, Europe’s iTraxx Crossover index widened from 231bp to 237.75bp.
Asia Ex-Japan began the year at 55.75bp, but has been weighed on heavily since by events such as the China Huarong spread blow-out in April.
Loan investors reap windfall from meme stock craze
The so called “meme stock” craze is having a tangible, positive impact on certain companies’ loan prices, according to market sources.
Beginning in January this year, users of social media sites such as Reddit have coordinated targeted buying campaigns against some of the market’s most heavily shorted stocks, supposedly using their January covid relief stimulus money to do so. AMC Theatres and GameStop were among the most high-profile beneficiaries earlier in the year.
In July, automation software firm Exela Technologies became the latest target of maverick investors. The company’s loan price rose from lows in the 20s to the mid-60s after it reportedly raised around $100 million.
Back in April, Schroders’ head of securitised credit Michelle Russell-Dowe told Creditflux that the influence of social media on capital markets could provide opportunities for credit fund managers. “The provision of capital and liquidity is likely to continue to evolve,” she said.
Many in the market expect the Securities & Exchange Commission to propose some form of legislation against meme stocks — but until then, several CLO managers are reaping a windfall.
According to CLO-i, the largest CLO managers to hold Exela debt are Anchorage Capital Group with $87 million, PGIM with $39.4 million, and Assured Investment Management with $24.3 million.
CLO managers have been net sellers of Exela this year with most of these sales in the 30s.
CLOs are ‘most bubbly of bubbles’, warns Arena CEO
Arena Investors chief executive officer Dan Zwirn is sounding the alarm that economic policy following the covid-19 outbreak has fuelled a bubble within leveraged finance asset classes.
“Given the current irresponsible monetary and fiscal policy, there’s an enormous amount of activity among those companies and assets that can access undifferentiated, price-taking capital,” Zwirn says.
“Doing those deals makes no sense on a risk-return basis for investors. CLOs in particular are the most bubbly of bubbles because no one sees themselves as taking a risk,” he adds.
New York-based Zwirn says his portfolio is positioned away from credits that fit the CLO or direct lending mould, such as smaller companies or those not backed by financial sponsors. He sees the current inflationary environment as non-transitory.
“We’re happier to do easier-to-execute deals where we get appropriately compensated,” he says. “But that hasn’t been available because of the tidal wave of capital driven by a secular change where irresponsible monetary policy combines with irresponsible fiscal policy to drive a yield hunger on the part of investors that’s driving strange outcomes.”
Zwirn’s view of credit market bubbles is fiercely rejected by those that work in the CLO industry. Speaking on the Last Tranche podcast last month, Carlyle Group’s co-head of liquid credit Lauren Basmadjian said that the covid crisis has led to CLOs being vindicated as an asset class.

She said today’s market looked like the start of a new credit cycle, where the worst loans had been flushed out through bankruptcy and the rest of the market had cut costs and was well capitalised.
Jets overcome turbulence as American Airlines repays debt
Although international travel remains suppressed by the coronavirus, US domestic air travel has rebounded, with the Transportation Security Administration data showing a return to 2019 levels of footfall at US airports. As a result, airline credits have mounted a dramatic turnaround.
American Airlines, for example, told investors in July it would repay its April 2023 term loan in cash. The airline repaid the $950 million loan at par and signalled it intends to continue paying down debt.
The recovery in airlines marks one of the most dramatic turnarounds of a covid-impacted industry. American Airlines’ term loan was trading in the mid-70s in early 2020 after covid hit, but recovered to over 95 before the repayment event.
American Airlines debt is widely held in CLOs, with Carlyle ($190 million), CIFC ($164 million) and Sound Point ($156 million) the biggest investors, according to CLO-i.
Sources in the process of refinancing airline debt say it is the cheapest they’ve ever seen it — an aircraft lease can get done at just 2 to 3%.
Airline debt represents some of the best opportunities today, according to an investment grade portfolio manager. He is allocating to longer-dated paper in this sector.
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Global credit funds & CLO's
August 2021 | Issue 237
Published in London & New York.
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