April 2021 | Issue 233
Analysis Credit
CLOs wheel and deal as overlap increases
Charlie Dinning
Data journalist
Tanvi Gupta
Head of data journalism
2020 CLOs are a different breed to any other vintage. But this cohort features an overlap of almost 40% as CLO issuers have been forced to focus almost entirely on secondary market loans
A lack of new issue leveraged loans in 2020 has meant US CLO portfolios are looking more alike. CLOs that went effective in 2020 had a 39.3% overlap, whereas the overlap was 35.3% when Creditflux analysed CLOs that closed across 2018 and 2019.
CLO managers also had to deal with a flurry of loan downgrades in 2020, which restricted what they could buy, again forcing a higher overlap between US CLO managers, according to market sources.
The new loans that did come to market were mostly extensions of previous capital from issuers to bridge cash burn and stay alive amid challenging conditions. This, and the fact that loan ratings slumped rapidly, meant CLO managers purchased most of their loans in the secondary market last year as the emphasis switched to trading and rotating in and out of loans.
Manager exposures (%) to largest leveraged loan issuers*
*Managers are top 10 based on the size of their portfolios from deals that went effective in 2020. Loans are largest in our data (see methodology)
An increase in short-dated CLOs
To accommodate deep discount secondary loans and wide CLO liability spreads, CLO managers tended to launch short-dated CLOs, typically with three-year reinvestment periods and one-year call locks.
Despite being largely restricted to the secondary loan market, one way to differentiate between US CLO managers is through their trading velocity, particularly as their loan forecasts change.
San Francisco-based Himani Trivedi, head of structured credit at Nuveen, says her team traded 35-40% of its portfolio last year, albeit in a relatively illiquid environment. “Given the limited supply of new loans, successfully managing 2020 vintages required that managers go beyond credit selection,” she says. They also needed to optimise capital structure, for example by moving to shorter non-call periods.
Octagon Credit Investors had the highest average overlap (48.6%) in 2020 with its fellow US CLO managers. CIFC Asset Management (48.5%) and Carlyle Group (47.7%) were close behind. Octagon and Carlyle also had the highest percentage of their portfolios in common with a 68% overlap.
“We needed to go beyond credit selection”
Himani Trivedi, Head of structured credit | Nuveen
New York-based Lauren Basmadjian is a key figure linking these platforms: in February 2020 she left Octagon ahead of a move to Carlyle.
Altice, a French multi-national telecommunications corporation, is the largest common exposure between Octagon and Carlyle. Carlyle held $23.8 million across its 2020 CLOs as per January trustee reports. Octagon held $56.4 million. Liberty Global was the second most held issuer between the pair. Liberty Global and Altice were also the most held issuers across the 2020 US CLO universe.
Guggenheim Partners had the lowest average overlap with its peers at 21.96%. Fortress Investment Group was just ahead at 22.03%.
Methodology
- Data includes US CLOs that went effective in 2020. Bond-flex deals, triple C-flex deals and reissues are excluded.
- For each pair of managers, the portfolio overlap figure is calculated from a comparison of the weighted average of common issuers across CLOs in the data. Overlap is based on issuer name.
- Figures are based on (or closest to) January 2021 trustee reports.
- All data has been sourced from CLO-i and Moody’s Analytics.
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Global credit funds & CLO's
April 2021
| Issue 233Published in London & New York.
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