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News Investor’s Corner
‘You have to prepare for further tightening’
by Lisa Lee
Lisa Lee: Thank you for being the first guest in Investor’s Corner. As a CLO equity investor, what are you thinking right now?
LL: How is the arb performing, and is CLO equity still attractive?
DM: We still think it can be very attractive, but believe it requires tactical timing and positioning. The challenge, of course, is sourcing assets at levels that make sense.
LL: Without naming names — how are you looking at managers right now?
DM: Our pool of managers remains fairly consistent over time. We have a specific view on the amount of credit risk, liquidity and diversification that makes sense for these structures. We tend to prefer platforms that operate with lower credit risk, higher liquidity and higher diversification. We believe that style allows for greater market value stability over time for the equity and for the transaction, and allows us to be more opportunistic and effective at benefiting from volatility when volatility happens.
It’s one of the most attractive and interesting times to be investing in CLO equity
Dagmara Michalczuk
Co-CIO
Tetragon
LL: When you get on the phone with your managers, what’s the first question you ask?
DM: One of the first questions is generally how they’re thinking about risk-reward in this market, and a very topical question of late has been spread tightening. “How much more spread tightening can we expect? What do you think?”
I think the expectation is that it’s going to be unprecedented and there’s a lot more to be done, given how much of the loan market is trading above par. The strategy has to be acknowledging the fact that you may have a more significant period of spread tightening than we’ve seen in the past.
Both loans and CLO liabilities are tightening but, of course, once you lock in liabilities in the primary market as an equity investor, those liabilities are locked, whereas you still face potentially another six, 12 or 18 months of spread tightening on the loan side. So you have to build your strategy around that potential for further tightening.
LL: And how about the macro environment? Outside of loans, we’ve entered a period where there’s a lot more uncertainty.
DM: We have a lot of uncertainty in the US around the shape of policy from the new administration and the impacts on portfolios. It is new in the sense that it’s not been seen recently, and we have such an unclear picture day-to-day, which makes credit investing quite challenging. But at the same time, uncertainty and volatility are par for the course. We’ve seen this asset class remain resilient across a lot of previous volatility. So I think that the core strategy for the asset class, and for our managers specifically, is to remain very diversified and positioned for volatility to pop up in places you potentially wouldn’t expect.
