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Global credit funds & CLO's
June 2023 | Issue 255
Published in London & New York.
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June 2023 | Issue 255
Event Creditflux symposium
CLOs march onward despite broken arb
CLOs march onward despite broken arb
Speakers at Creditflux’s CLO Symposium agreed that the arbitrage has been terrible this year. But they were also united in their pleasant surprise that this hasn’t shut the market down
“Our LTD model allows you to spot credit events at the earliest possible moment”
John Bringardner
Executive editor, Debtwire
Debtwire has launched its Likely to Distress (LTD) analytics as part of its next-generation platform. The scores are generated by a machine-learning algorithm and identify companies most likely to become stressed, distressed or enter a restructuring.
“Now is the time the zombies that have been staggering on will fall over”
Chris Porter
Head of private equity, loan & CLO business development, EMEA, S&P Global Ratings
Some over-levered companies will need restructuring as interest coverage bills rise.
“We need to convince the people outside of this room”
Steve Baker
Head, euro CLO primary, JP Morgan
Baker reminds the audience that, although they understand CLOs, they require a wider investor base to make the arbitrage work.
“The complexity premium isn’t high enough”
Jane Lee
Senior managing director, Blackstone Credit
Blackstone are receiving calls from investors interested in CLOs, but the complexity premium isn’t high enough to tempt them in.
“I need some certainty I won’t be marking it down five points on the break”
Jonathan Bowers
CIO, Acer Tree Investment Management
Bowers explains a challenge of buying primary paper for a fund which is marked daily.
“We’re selectively open for business to the right managers”
Dushy Puvan
Head of EMEA CLOs, BNP Paribas
Not all banks are still opening warehouses, but BNP Paribas remains committed to ramping cautiously and selectively.
“Anti priming makes sure managers have the greatest flexibility”
Aaron Scott
Partner, Dechert
European CLOs are including language in their documents to reduce the worst dangers of lender-on-lender violence.
“PE is still sitting on a significant pile of dry powder”
Adeel Shafiqullah
Executive managing director, Sculptor Capital Management
The supply-side of the European loan
market should improve in the second half of 2023 as private equity has capacity to drive
M&A deals.
“It’s funny to think there’s been nearly $40 billion of issuance this year when the arb doesn’t make sense”
Shiloh Bates
Managing director, Flat Rock Global
Bates remains sceptical that CLO captive equity funds have changed the dynamics of the market (see news).
“With a captive fund you can be nimble”
Himani Trivedi
Head of structured credit, Nuveen
Captive CLO equity funds may have a narrow mandate, but they allow a manager to make decisions very quickly.
“A portfolio in the new issue market looks similar to one we saw a year ago”
Tracey Jackson
Managing director, First Eagle Alternative Credit
First Eagle is cautious on primary as it’s seeing older, more seasoned, portfolios with newer capital stacks.
“You have to keep fairly agnostic”
Andrew Lennox
Senior portfolio manager, Federated Hermes
When looking at the relative value between primary and secondary, the markets are flip-flopping so quickly investors need to stay flexible.
“We’ve been moving away from healthcare names we’ve been happy with”
Madelaine Jones
Portfolio manager, Oaktree
Some strong sectors, like healthcare, have high leverage because of that strength, and could come under pressure in this rising rates environment.
“It could cause tremors across the market”
Camille McLeod-Salmon
Portfolio manager, Fidelity Investments
Easy amend and extends have been done, so some names in the 2025 maturity wall with loan/bond structures may make investors rethink their assumptions.
“Half the defaults this year should have very high recovery rates, possibly 100%”
Matthias Neugebauer
Head of European structured credit, Fitch Ratings
If many defaults this year are amend and extends to solve refinancing challenges, they should have high recovery rates.
“The liquidity premium is problematic in new ABS”
Orlando Gemes
Founding partner, Fairwater Capital
Structures which are less vanilla do not have the same liquidity as broadly syndicated CLOs, and investors need to check they are compensated for that risk.
“The CLO would use a sidecar. Subordinated noteholders invest into it”
Claire Puddicombe
Partner, Cadwalader
Brigade has introduced a new approach on how to replicate loss-mitigation language from newer CLOs into its older European deals.
“CLOs past their reinvestment period could become de facto static deals”
Philippe Jodin
Partner, Alegra Capital
With the market for CLO resets closed, weighted average life tests could cause problems for older deals as their asset pools deteriorate.
“We want the triple C bucket to be there for rating migration”
Alan George
Head of structured products, Golub Capital
George explains why Golub put recurring revenue assets into dedicated structured credit vehicles, instead of including them in existing MM CLOs.
“You can’t look at the traditional ratios”
Gabriele Gramazio
Senior director, structured credit, KBRA
The assets going into recurring revenue ABS are a new form of direct lending for tech companies in late stage growth. Sometimes they require a new approach to assess risk as they may not yet be making a profit.
“The difference is 10% over a period of four or five years”
Rizwan Akhter
CLO portfolio manager, Generate Advisors
Whatever the current arbitrage for CLO equity, the driving force behind the final IRR is manager performance, and that’s what investors should focus on.
“I can’t sit there in the hope the market lets me do a refi in two years”
Matthew Layton
Partner, Pearl Diver Capital
Whether you look at Europe or the US, primary or secondary, CLO debt offers value that primary CLO equity can’t match.
“Broadly syndicated and direct lending markets are converging”
Adrian Marshall
Chief executive officer, Elmwood Asset Management
Sponsors look at both, but private credit offers certainty and speed of execution in volatile markets.
“Liquidity is pretty robust in secondary”
Edwin Wilches
Co-head of securitised products, PGIM Fixed Income
April was the highest month for CLO secondary trading ever, but there is a lot of dispersion around certain managers and portfolios.
“This is the time to deal with credit risk and burn a little par”
Michael Nechamkin
Chief investment officer, Octagon Credit Investors
Octagon has a defensive focus, reducing triple Cs and dramatically reduced B- credits, even if it costs some par. In the future, that par can be replaced.
“I misjudged in 2021 how aggressively sponsors kept their companies well positioned”
Jeff Bakalar
Former group head
With loose documents, the behaviour of sponsors will be a key driver of recoveries.
“We always have two to four warehouses open”
Mohammed Seif
Co-founder and managing partner, Lakemore Partners
Anchor equity investor Lakemore believes in making capital available for the managers it works with so they can act fast in a market dislocation.
“Recoveries are going lower and lower as these docs allow more manoeuvring”
Andrew Chung
Partner & senior portfolio manager, AS Birch Grove
The dispersion and complexity of recovery rates have increased in the past few years. You have to know which sponsors are going to be predatory.
“There’s a steep reinvestment period curve”
Mikkel Sckerl
Senior partner, Capital Four Management
When a deal is approaching the end of its reinvestment period there’s less appetite and less liquidity — and more mark-to-market risk.
“Five years ago, I never had a full-time loan trader… now I can’t imagine doing my job without one”
Justin Driscoll
Chairman, Aquarian Credit Partners
As liquidity in the loan market improves, so does the importance of having someone with their ear to the ground.
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