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March 2021 | Issue 232
Opinion Credit derivatives
CLO guys shouldn’t feel quite as self-important as us Welsh... But you are in a pretty amazing spot
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CLO portfolio managers should be emboldened by recent events to push for ESG strategies
CLO portfolio managers are as hot a commodity as copper in 2021, with big firms queuing to enter the market and pricing for their impact-tested, inflation-defensive assets going from strength to strength.
This is no bubble like Bitcoin (or Italy) and practitioners should realise they have the world in their hands after a tough year, and all the setbacks, anguish and failed tests of this time in 2020. But enough about Welsh rugby, I’m supposed to be discussing CLOs.
Actually the rugby does merit an instructive aside since, at time of writing, my nation finds itself in prime position having bested the might of first Ireland and then Scotland. Ahead lies a pivotal battle against England that will cement or scupper our returning sense of superiority.
The British version of funny shaped balls might not have much relevance for US readers, but let’s just say Wales turned up to 2020’s Six Nations competition much like the Kansas City Chiefs did to Super Bowl LV. So you see why the improvement matters.
It also chimes well with rising post-Brexit opposition to the British union in what at times feels like a Twitter-based country. In February, former Plaid Cymru (Welsh nationalist party) leader Leanne Wood raised a social media storm by referring to Labour leader Keir Starmer with the derogatory hashtag ‘Keith’. Cue an online backlash that included statements such as “Wales does not deserve independence” — surely the biggest affront to devolution since Henry VIII.
And then reports came through saying Sir Keir would countenance Welsh independence if the calls were strong enough and if he were prime minister. Big ifs in a seemingly small teapot, but there is a wider implication when the independence calls of our noisier neighbour Scotland could be a defining feature of this UK parliamentary term.
Almost in tandem, another Keith was dismissed from his job as director at food retailer Iceland for blog posts saying the Welsh language sounded “like someone with bad catarrh clearing his throat”. Personally, I’m not keen on making Welshness a protected characteristic, but Iceland soon felt the full weight of the Welsh CDS mafia as its five-year synthetic spread blew out by 60bp.
All of which is not to suggest you CLO guys should feel your own self-importance as keenly as us Welsh… But you are in a pretty amazing spot.
Stars align for CLO managers
In Europe especially there is a drive among big firms to join the CLO party, as Creditflux’s reports on Fidelity, Jefferies, Neuberger Berman and Schroders attest. With a limited pool of portfolio managers and experienced bankers to choose from, the supply/demand imbalance will play out in high profile hires and whole team acquisitions.
Active portfolio management is generally back in vogue. Given the absolute tightness of markets and potential for downside, the days of relying on beta strategies to achieve targets are numbered — so this again means talented personnel should be top of the bucket list.
CLOs offer some of the best returns available for well rated paper, but also match floating rate assets with liabilities. That is hugely advantageous when rising inflation and interest rates are among the biggest fears. Meanwhile, corporate defaults have dropped due to government/central bank interventions and signs of economies reopening from lockdown, and CLOs proved last year they are more than able to handle a crisis.
It even appears from a recent legal outcome that should a big US bank ‘accidentally’ wire your CLO a whopping payment on a loan, you don’t have to give it back. Well done you!
Wielding all this new-found power, what will you do? Might I suggest, beyond the obvious individualistic considerations, you get your firms to finally push environmental, social and governance concerns as the centrepiece of their approach?
CLOs have been woefully slow to cater for rising ESG demand, and lack of standardisation arguments only go so far. With investors eager to back compliant securitised products, this looks like being the final hurdle to making your jobs utterly indispensable. And, you know, that’s a good thing — rather like a home win against England.
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Global credit funds & CLO's
March 2021
| Issue 232
Published in London & New York.
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