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February 2021 | Issue 231
Napier Park fund ends 2020 on top with massive 29.5% gain
Napier Park Global Capital stormed to the top of our credit hedge fund rankings for 2020, registering a gain of 29.49% through Napier Park Eton Fund.
The strategy invests across corporate credit and CLO tranches and was down 23.1% in March. But it erased that loss in May and June alone, returning 16% and 14.81% across those two months.
The top performer in December was Flat Rock Opportunities Fund, which posted 10.14% for its CLO investment strategy.
Search firm highlights lack of diversity across Euro credit
A report on diversity within the corporate credit industry has shed light on the imbalances that persist. Penned by London-based search firm Waterman Stern, the paper finds that women make up just 14% of professionals working across the direct lending, CLO, distressed debt and leveraged finance markets in Europe, and ethnic minorities make up just 12%. The European CLO industry is in line with those figures.
“It is fundamental for organisations to foster a dynamic environment that welcomes diverse perspectives,” says Sarah Bittar, head of operations at Waterman Stern, adding that embracing such a culture will provide a competitive advantage. “Diverse groups of people bring different perspectives to problems and better ways of solving them.”
Imbalances are greater at senior levels, with women taking just 7.9% of roles ranked managing director and above in the study of 5,714 people.
Flexibility is also important. Bittar says employers need to think about return-to-work patterns for parents and those taking career breaks.
The paper finds that the CLO market offers the best path to progression for women in credit, stating “you are more likely to be an MD [managing director] or partner at a CLO manager than you are in a distressed or direct lending fund”.
Bittar: ‘embracing diversity brings competitive advantage’
Refis and resets fly amid tight spreads and outlier 2020 CLOs
CLO refinancing and reset activity got off to a rocket-fuelled start in 2021, with over $9.48 billion printing on a global basis — almost reaching the $9.76 billion printed between March and December of 2020, according to Creditflux data.
With eligible 2018 vintage deals out of the money for a refi or reset in 2020, and with 2019 and 2020 deals rolling off their non-call periods this year, many analysts are predicting a record refi wave that could even outstrip the $104.42 billion priced in 2017.
Managers view resetting their super-wide 2020 deals as a no-brainer, but resetting older vintages depends on how tight spreads go.
Transactions are shaping up to be deal-specific — many CLOs destroyed par amid the early months of 2020 and would require the equity investor to put up extra capital.
Spreads across the capital stack have tightened in the wake of the US presidential election and as a result of the covid-19 vaccination rollout, with double B CLOs coming in 191.14 basis points since the start of November, according to Prytania Solutions’ CLO index.
Tranches senior to that have tightened anywhere between 31.83bp for triple A tranches and 49.84bp for triple Bs.
CLO managers agree to one-time ESG deals
Environmental, social, and corporate governance (ESG) is continuing to take root in the CLO market. But the movement is still largely driven by end investors, so some issuers are opting to integrate ESG into their investment mandate on a one-off deal-by-deal basis, rather than integrate it into their platform.
Sources say that some CLO managers are agreeing with equity investors to work together on CLOs that meet their ESG requirements, but reverting to non-ESG CLOs on subsequent deals.
Investcorp’s US head of credit management David Moffitt says industry standards need to be tightened.
“Currently, the ESG movement is being driven by investors, but financial markets need to come into alignment about what ESG actually means — a series of one-offs with individual investors will not do,” says New York-based Moffitt. “This might be something that makes sense for the ratings agencies to help define and regulate as another value-added service in which the manager either meets or doesn’t meet the prescribed standards.”
The roster of ESG-integrated CLO managers in the US continues to expand. Some of those out the gate are Benefit Street, Columbia, First Eagle, New Mountain and Palmer Square.
Biden buzz highlights credit’s growing pains
Stimulus and a “reflationary window” are the dominant themes of early 2021, particularly in the US, and they will favour growth assets over credit in the near term, say investors.
Few portfolio managers are betting against credit in 2021, given central bank buying programmes and hopes that covid vaccines could soon help reopen economies. Successive weeks of fund inflows suggest any influx of new debt through primary markets will be quickly lapped up and keep a cap on borrowers’ funding costs.
But there has been a decoupling of credit from other markets in the year’s first weeks, with bonds trailing improvements in stock indices and oil, while CDS indices have underperformed bonds.
“It’s the race to the bottom for credit and to the top for equity,” says Pierre-Yves Bretonniere, head of credit relative value trading strategy at BNP Paribas.
The S&P 500 index gained 4% from the start of January, and WTI crude 9%, while the iShares iBoxx US dollar high yield corporate ETF has been marooned in a narrow 86.9 to 87.4 cents range.
“The first half of the year looks very geared towards growth and inflation targets,” says a credit portfolio manager in New York. “That takes the focus off credit a bit and there’s not much room to improve from where prices are at the moment.”
US high yield bonds vs stocks
Italy gives short-lived succour to credit short strategies
Events in Italy last month showed there is still opportunity for nimble short strategies in credit despite the weight of technical factors pushing down spreads. But they also gave a warning of how quickly windows can shut and become painful squeezes.
Credit shorting proved one of the most lucrative trades in 2020 amid the covid-19 market sell-offs of late February to early April. But attempts to replicate the strategy for a second wave of the virus in October/November were crushed by the market’s grind tighter due to vaccine announcements and Joe Biden’s election victory.
This left most reticent to employ even selective shorts. But Italy’s political turmoil in January, coming after a strong bull run for the country and its banks, provided a fleeting glimpse of what nervousness can do to overly tight credits.
Former prime minister Matteo Renzi pulled two ministers from Guiseppe Conte’s governing coalition cabinet, prompting a sharp widening of Italian banks and five-year sovereign CDS to surge back over the 100 basis point mark.
Conte survived confidence votes but later resigned. Italian spreads have improved, but nervousness remains in investment grade CDS given the collapse of dispersion.
Brexit trade deal bolsters private debt deal-making
The long-awaited Brexit UK-EU trade deal struck on 24 December has provided private equity sponsors with a level of certainty, say market participants, even though a financial services deal is still to come.
Lenders say they have not faced a slowdown in UK deal flow. In fact, London-based David Miles, partner at law firm Dechert, says that the trade deal has bolstered deal-making.
“Over the past few weeks, overseas private equity houses become much more interested in the UK market, partly due to its undervaluation relative to other markets and, with the trade deal now struck, the lower level of uncertainty,” he says.
For new deals, lenders will need to analyse target entities to assess how easily these businesses will continue to trade following the Brexit trade deal, and how much friction will exist in terms of their ability to import/export with Europe and the world. Some firms report that sources of supply are becoming more difficult to obtain.
Cross-border fundraising will also be hit by Brexit. The good news, says Chris Gardner, partner at Dechert, is that most managers have operated based on a hard Brexit since 2018.
“Many UK entities established Irish and Luxembourg AIFMs [alternative investment fund managers] so they could continue to have an EU-regulated entity in their structure, and hired or redeployed staff out of the UK so they had the right substance sitting in their new entities to carry out management and marketing functions,” he says.
Others have bolted on to third-party managers.
FS bridges CLO gap with broadly syndicated loans
FS Investments has expanded its platform to include CLOs backed by broadly syndicated loans, with officials saying the firm capitalised on solid conditions late in 2020.
The new strategy sits in the firm’s $2.5 billion liquid credit and special situations business, led by Andrew Beckman in New York. He says that CLO liability spreads caught up with loans in Q4 as the firm priced Bridge Street CLO I on 29 December.
Although FS has special situations expertise, the firm is looking to run a conservative portfolio, says Chris Condelles, FS’s head of capital markets.
Condelles says there are other, more suited vehicles to be opportunistic in: FS Investments’ flagship global credit opportunities fund, for instance, invests in directly originated and special situations alongside traditional high yield and performing loans.
FS has been involved in middle market CLO issuances through its partnership with KKR. In 2019, FS KKR Capital Corp issued a mid-market CLO via Citi.
Condelles: looking to run a conservative portfolio
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Global credit funds & CLO's
February 2021
| Issue 231
Published in London & New York.
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