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CLO managers turn defensive as uncertainty brews
by Lisa Lee
Credit markets are undergoing a paradigm shift. For CLOs, caution and defence have become the bywords as market participants assess risks from tariffs, spending and job cuts via the Department of Government Efficiency (DOGE), and potential geopolitical realignments.
“The market has changed and the risk profiles have changed,” said Lauren Basmadjian, global head of liquid credit at Carlyle. “Especially in industries that you think could be impacted by policy change or tariffs, I think that you have to invest in companies that have margin for error.”
Lenders to government technology contractor Peraton had a painful lesson. The firm tapped Guggenheim Partners as financial advisor amid concerns about potential federal spending cuts, as reported by Debtwire. Its USD 6.145bn term loan tumbled multiple points to below 90 cents on DOGE concerns, and opportunistic credit buyers are sniffing around.
The arbitrage should increase
Victoria Chant
Global head of capital formation
Blackstone
“Volatility is not unexpected, given the macroeconomic and geopolitical uncertainty. We have generally adopted a more defensive approach in our portfolio... although there is no panic in the market at this stage,” said Serhan Secmen, head of global CLO platform at Napier Park Global Capital.
President Donald Trump’s policies look to be inflationary, so they prevent the Federal Reserve reducing interest rates and potentially slow economic growth. Defaults have been roughly 4% when liability management exercises are counted, and that figure may not come down this year, said Basmadjian.
Weakness in both leveraged loans and CLOs has been constrained so far. Some CLO players are cheering the end of loan repricing and the possibility of widening loan spreads, which would boost the arbitrage that often drives CLO formations.
“We really like CLOs with longer reinvestment periods right now,” said Victoria Chant, global head of capital formation at Blackstone Credit & Insurance. “On CLO equity, the arbitrage is one of the things you want to consider, and it should increase.”
The European CLO market is also feeling an impact. While there’s excitement over the potential boost to GDP from government spending, that’s being tempered by worries about a tariff war.
“It’s too early to form a conviction view on if, and by how much, upcoming trade policy actions will impact corporate credit issuers in Europe. Our strategy has been to overweight defensive sectors and focus on bottom-up fundamental analysis,” said Adeel Shafiqullah, head of European CLO management at Sculptor.
