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July 2021 | Issue 236
CLO debt investors add risk by dipping into equity tranches
Hugh Minch
Investors that have traditionally bought CLO debt are piling into equity tranches, sources say. This comes as the arbitrage between CLO assets and liabilities has reached its most attractive level in years (see cover story).
One CLO manager says it has taken requests for CLO equity from investors that have historically bought the senior-most parts of the capital stack, such as triple or double A-rated bonds.
Sources say these investors are positioning themselves for early credit cycle conditions by adding risk.
“I’ve seen insurance companies come into equity, and also more asset managers that have historically been buying the triple B or double B bonds picking up the equity, too,” says Tricia Hazelwood, international head of securitised products at MUFG in New York. “They tend to focus on smaller pieces rather than majority equity.”
Newcomers attracted by the record arbitrage between CLO assets and liabilities are allocating to CLO equity for the first time.
“We’ve seen some new people come into the equity tranche, which is encouraging, and they were thoughtful about why they were coming into that space, finding equity investments to be an attractive relative value play,” says Hazelwood.
“We’ve seen some new people come into the equity tranche”
Tricia Hazelwood, International head of securitised products | MUFG
In addition to new entrants, existing investors have been raising new CLO equity funds and are ready to put bids in at attractive entry levels.
Pearl Diver Capital, for example, is targeting $450 million for a global CLO fund, as reported by Creditflux last month, after holding a first close at the end of March.
Other more risk-averse investors are reportedly taking a closer look at lower-rated CLO tranches in the aftermath of the market shock triggered by the covid-19 pandemic.
The performance of these vehicles throughout the pandemic has allowed sellers to point to a strong track record through two crises, and many say the common accusation that CLOs will trigger another 2008-style credit event is beginning to ring hollow with potential clients.
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Global credit funds & CLO's
July 2021 | Issue 236
Published in London & New York.
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