Global credit funds & CLO's
April 2020 | Issue 222
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.
Opinion CLOs
Olga Chernova
Image_1
CLO investors should be able to see live secondary trading levels
Chief investment officer Sancus Capital
April 2020 | Issue 222
Born: St Petersburg, Russia
Lives: Santa Monica, California
Education: MBA at Columbia Business School in New York
Last holiday: Big Sur, California
Favourite movie: Lawrence of Arabia
Hidden talent: A sense of humour in dark times
Sancus Capital: Focuses on structured products and derivatives. It uses a wide array of products, ranging from simple investments like corporate bonds to CDX options and CLOs
Career: Chernova started out in credit in 1999, trading and investing in single name CDS, CDX indices, tranches and options at Goldman Sachs, Dillon Read and then JP Morgan. In 2009, Chernova founded Sancus Capital at the peak of the financial crisis. Sancus recently pioneered an online process for refinancing of structured products, called applicable margin reset (AMR).
Share this article:
Q. This is a step towards CLO efficiency. What else would you change about the industry?
A. I would love to see CLOs move towards electronic trading. Right now they trade with an illiquidity and complexity premium. It can take two hours to prepare a b-wic, then you get hit by someone’s out-of-office email, and then maybe you find the docs aren’t in place.

We have looked closely at auction theory. Applying it to the CLO market, I believe that for the best economics you must give all the information to all participants before an auction. It has to be as open as possible. To achieve that investors should be able to see trading levels live. Communicating bilaterally with 30 dealers is impossible. But an electronic platform would bring CLO investors together. To further promote liquidity and participation I would suggest transparency on post-trade colour being shared with all auction participants.
Q. As one of the pioneers behind applicable margin resets, how did the first AMR CLO auction go?
A. The refinancing of TCW 2019-1 ran incredibly smoothly — we just sat in our chairs and it was done in two hours. The TCW deal saw about $1.1 billion flow through the KopenTech platform, which provided the auction technology. AMR costs are small, but what people do not pay attention to is the opportunity cost of regular refinancings, which tend to drag on. With AMR you can give five days’ notice, which is about as close to the CSO market as you can get in terms of efficiency.
Q. The early part of your career was centred on credit derivatives. What made you gravitate towards CLOs?
A. Liquidity is very important to us. It’s what made credit default swaps and CDS indices originally so attractive. But in 2013 we saw a secondary market developing for CLOs, which attracted us and many other hedge funds that prioritise the ability to trade an asset.
Q. What is the best investment today?
A. In today’s environment, triple A CLOs at greater than 500DM sound very attractive. As the government rolls out plans to buy IG, corporate credit spreads will normalise. This will likely create more than four times spread differential between corporates and CLOs. It’s a great opportunity.
Q. What is the worst investment today?
A. Middle market CLO mezz. These deals were priced too close to regular CLOs backed by syndicated loans in terms of spread. But the difference in liquidity for the underlying loans is huge. With the coronavirus pandemic, the government might be too late and lack efficient programmes for lending to small businesses. Some of them will struggle to survive. Direct help to consumers still leaves many small companies vulnerable and will not prevent some closing.
Q. Who is your inspiration?
A. My two little boys inspire me every day. They are always positive, willing to try again and know what they want.
Q. What are your expectations for 2020?
A. I think we will get through the crisis, and financial markets will bottom a lot faster than main street businesses recover.

I am hopeful that 2020 will be a positive test case for CLO equity. Those deals that still have time left in their reinvestment periods and smaller triple C buckets are well positioned for a recession. CLOs are an excellent tool for trading volatility. The average recession lasts for 18 months, but you have to remember that there will be blue skies at the end. If you can stomach mark-to-market volatility, then you can benefit, knowing that CLOs these days get reset and can run for 10-plus years. The locked in financing, for an equity investor, is priceless.

We are interested to see how managers perform. With the Fed supporting IG credit, once markets stabilise and issuance returns for select managers, the CLO arb will look a lot better.
left_arrow.svgright_arrow.svg