Israeli fund looks beyond carry to discounted CLO double Bs

Sayed Kadiri

Editor

A CLO fund set up in Israel a year ago is looking to unlock value in double B-rated tranches and is finding opportunities in the primary market where junior CLO tranches are regularly pricing at a discount.

1L-More Investments was established in July 2020 and is based in Ramat Gan, in the Tel Aviv metropolitan area. It launched a mezzanine CLO debt fund in September to cater to its investor base, which is predominantly high net worth individuals and family offices in Israel.

Co-founder Josh Soffer founded relative value credit hedge fund manager Rion Capital in 2011 to invest in CMBS, CLOs and credit correlation products. The fund wound down in early 2017.

He says that the focus for 1L-More Alternative Credit Fund is on CLOs alone and double Bs in particular. “The emphasis is on low dollar price securities,” says New York-based Soffer.

“We tend to look at the cleaner deals of some of the off-the-run CLO managers and the weaker portfolios of the top-tier managers.”

The CLO fund now has over $30 million in assets and has another $30 million in commitments on the way. The return target is 7-9%.

“The emphasis is on low dollar price securities”

Josh Soffer, Co-founder | 1L-More Investments

The CLO secondary market is usually the best place to source discounted mezzanine bonds, but of late double Bs have been pricing at a discount in the primary market. Since 1 June, 27 new issue US CLOs have priced with discount margins (DM) disclosed and 15 of these featured discounted double Bs, according to Creditflux data.

The average double B DM of the 27 US CLOs is 680.7bp, and it ranges from 595bp to 800bp. Looking at the bonds which were issued at a discount only, the average moves up to 723bp.

“A fund of our size can source unique CLO profiles and there have been times when we have been able to find new issue double Bs pricing at 95 cents for an 800bp DM,” says Soffer.

He adds that he is focused on directional strategies because “relative value tends to underperform in a rally and, although it outperforms when markets are down, you don’t get the credit for it.”

Timing trades is critical for relative value approaches. Soffer says that Rion had a large short position in mall-heavy CMBX tranches, but had to unwind this as part of its liquidation just months before the trade would have come good.

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Global credit funds & CLO's

August 2021 | Issue 237

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