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January 2021 | Issue 230
CLO Investor Summit
CLO issuers flex their bond muscles
Some panellists at Creditflux’s US CLO Investor Summit pointed to structural difficulties, but the consensus was that flexibility — particularly the ability to buy bonds — could improve performance
“In a traditional CLO, active management means selling a loan to buy a loan”
Yale Baron, Portfolio manager | Anchorage Capital
In a bond-flex CLO, managers cannot lever excess spread as they would in a regular CLO because bond-flex CLOs are less levered and have a higher cost of debt. They have to maximise the flexibility of the structure by making relative value trades across performing credit.
“Price, loan rating and defaults react to market information at different speeds”
Gretchen Lam, Portfolio manager | Octagon Credit Investors
It is important to contextualise data, says Lam. Loan default numbers for this year look big, but breaking figures down on a quarterly basis reveals how rates are falling.
“Some managers have fantastic equity returns, but don’t understand their own indentures”
Kevin Bliss, Research consultant, credit and multi-asset strategies | NEPC
Bliss says that CLO investors have told him that some small CLO managers have outperformed, but risks persist because a few do not fully appreciate their deal documentation.
“Alternative strategies have better alignment to fees than CLOs”
Eli Sokolov, Managing director | Cliffwater
Incentive fees make up the bulk of a manager’s fee stream in other markets, but that’s not the case in CLOs.
“CLO triple As sold off more than the historical beta implies”
Amir Vardi, Portfolio manager | Credit Suisse Asset Management
In the beginning of 2016 loans slumped 6.5%, and CLO triple As fell 1.8% for a 0.3 beta relative to loans. That same beta applied to the credit sell-off in late 2018. But this year, loans were down 21% while CLO triple As were down 11% — about half the move.
“There’s little differential between where a downgraded CLO and a non-downgraded CLO trade”
Matthew Andrews, Head of capital markets | CIFC Asset Management
There were fears that downgrades would lead to forced selling but that did not transpire, partly because of the magnitude of downgrades.
“There’s a misconception that bonds are riskier”
Buo Zhang, Structured products | Symphony Asset Management
Zhang compares bonds to loans and says that looking back at past recessions this has not always been the case. Typically, bond issuers have been less levered than loan issuers.
“You’re not restricted in the types of equity security you can purchase”
Rich Reilly, Partner | DLA Piper
Reilly describes a big advantage of the ‘no-ownership method’ over the ‘loan securitisation exemption’ as a means for CLOs to buy corporate bonds (under the updated Volcker rule).
“We’ve been doing a lot of work with banks [to invest in bond-flex CLOs]”
James Kane, Managing partner | GreensLedge
GreensLedge recently priced a bond-flex CLO with floating rate triple A notes and Kane hints this was to cater to banks, which prefer floating rate over fixed rate long duration paper.
“Most CLOs have incorporated the no-ownership interest method”
Sean Solis, Partner | Milbank
Since the Volcker rule was amended, most issuers have opted for the no-ownership interest route for buying bonds.
“We haven’t downgraded any bond-flex CLOs”
Al Remeza, Head of CLOs and new structured credit ratings | Moody’s
Performance has been relatively strong. Warf scores declined 9% this year, while warf fell 12% on regular CLOs.
“Trups deals were trading at levels implying high yield”
Omer Ijaz, Partner | EJF Capital
Following the financial crisis, the buyer base for trups-style CLOs was limited. Today these are still trading below fair value.
“Some managers have assets classified under multiple industries”
Peter Sallerson, Senior director | Moody’s Analytics
Sallerson reasons that perhaps this is because different portfolio managers have different views on how to label a particular loan.
“There are some tension points…”
Sean Griffin, Co-head of global primary CLO business | JP Morgan
CLOs have gained flexibility to participate in loan restructurings, but CLO debt investors may have different views to equity investors on what proceeds should be used. And rating agencies will have to weigh up how much par leaves the structure.
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Global credit funds & CLO's
January 2021
| Issue 230
Published in London & New York.
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