Global credit funds & CLO's
February 2020
| Issue 220
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.
News
CLO double Bs begin bounce back in b-wic bonanza
Seth Brumby
Head of Americas
Sayed Kadiri
Editor
Charlie Dinning
Data journalist
February 2020
|
Issue 220
There is renewed hope for junior US CLO debt tranches this year with plenty of funds raised in late 2019 targeting this opportunity and a spike in trading volumes in the early weeks of January. However, dangers still lurk with investors cautious about allocating to CLOs that have barbelled portfolios.
According to a trading note from Morgan Stanley, $478 million of double Bs were posted on b-wics in the week commencing 13 January (with a 56% trade rate). That was the highest weekly supply since the third week of January 2017 when $547 million of double Bs were on b-wics.

A lot of selling, say sources, comes from fund managers which held firm in the fourth quarter when double B valuations plummeted. According to CLO-i, the average trading price of a US CLO double B with three or more years of reinvestment left, fell to 83.40 in November. Last month saw prices lift to 94.95.
But New York-based Seçmen cautions against some double Bs. Given the loan repricing wave that is taking place, some CLO managers might be tempted to construct barbelled portfolios — buying some of the low margin/high quality loans in the market and mixing them with illiquid loans with high coupons. This can result in CLO portfolios with slightly higher than average spreads.

The problem, Seçmen says, is that investors look at portfolio tails — the widest and most high risk loans. “Mezz investors should be wary of risk distribution amongst the tranches, as most of the risk is pushed to the mezz tranche on highly barbelled portfolios,” he says.

There is plenty of cash in place to take advantage of the double B opportunity. “People were hesitating to buy in Q4, but investors have turned purchase plans back on,” says Alex Navin, portfolio manager at BlueBay Asset Management.

BlueBay is one of many managers to have launched 2019 funds that can invest in CLO debt or equity. Others include Clarion and CSAM.
Share this article:
“The secondary market seems to be cheaper”
Serhan Seçmen,
H
ead of structured credit | Napier Park Global Capital
According to the JP Morgan CLOIE index, the total return for US CLO double Bs last year was 6.92%. But this is underperformance on a risk basis compared to triple Bs (6.9%) and single As (6.06%)

“CLO double Bs were beaten up too heavily in 2019 — right until the end of the year,” says Serhan Seçmen, head of structured credit at Napier Park Global Capital. “The secondary market seems to be episodically cheaper, because a lot of credit risk tends to get priced in whenever there is volatility. The cost of liquidity increases at such times. Hence, there is a potential upside for the right bonds.”
US CLO double B covers
Share this report:
Share this report: