Global credit funds & CLO's
August 2020 | Issue 226
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Event CLO webinar
Don’t obsess over the state of your OC cushions
August 2020 | Issue 226
During Creditflux’s live CLO webinar last month, panellists agreed that fighting to keep an over-collateralisation test in compliance could do more harm than good in the long term
During the webinar, Napier Park’s Serhan Secmen described March’s sell-off as like a garden party. At first, the guests are talking quietly. But a wasp appears, leading to a stampede for the only exit gate. “The stampede causes more casualties than the wasp would have done,” said Secmen.

This analogy was brought up a couple of times during the webinar. Sky Road’s Eiman Abdelmoneim pointed out that CLO managers who constantly question assumptions would have been best placed during the credit sell-off. “Maybe some managers at Serhan’s garden party were thinking about reducing B3s, while everyone else was sipping tea,” he said.
Citi tracks how a manager has built par since inception using a price-adjusted par build metric. Wang finds that the dispersion between top and bottom quartile managers was about 40 basis points in April. The top quartile of managers built 20bp and tended not to sell triple C assets. Instead they added discounted assets to their deals.
“It helps managers answer the question, what if?”
Eiman Abdelmoneim, Head of product | Sky Road
The Sky Road platform functions as a driver assist and satisfies a manager’s curiosity by helping them answer questions about their portfolios. It’s not just about running tail-risk scenarios. Managers are able to pick at credits and assess the resultant par burn/build if they were to replace loans within their CLOs at certain prices.
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“It’s not just about active trading, you have to make smart choices”
Maggie Wang, Head of US CLO and CDO strategy | Citi
“Managers that do well over the long term are the ones that adapt to their environments”
Serhan Secmen, Partner & head of US CLO investments | Napier Park Global Capital
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CLO managers that are naturally conservative tend to do well in the early phase of a crisis. Those that are aggressive outperform during the recovery phase as they have higher beta. Over the course of many years, the firms that outperform are the ones that tweak their approach depending on market conditions.
But there are long-term consequences. Some managers might be too fixated on the interest component of their CLOs at the expense of principal. For example, a manager may decide to sell a triple C name in the 80s in order to pass over-collateralisation tests. But if they ultimately believe that loan will repay at par, it’s a 20-point par burn.
“Managers might face reputational pressure to solve OC problems...”
Jim Wiant, Senior portfolio manager | MidOcean Credit
Wasp attacks at garden party
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