News in brief

November 2021 | Issue 240
Niche credit funds make mid-market flexibility count
Funds that have the flexibility to invest in mid-cap debt issuers prospered in September, amid the usual swarm of outperforming CLO funds.
Wasserstein Debt Opportunities Fund gained 4.4% in a strategy that seeks to avoid bonds and loans issued by large-cap companies.
Robus Mid Market Value Bond Fund has a more specific niche, targeting mid market opportunities predominantly in German-speaking countries, and it gained 2.46%.
A distressed fund run by Pictet also made a strong impression, gaining 3.59%.
But CLO funds have not been silenced: seven of the top 10 hedge funds in September invested in CLO tranches.
Ares joins CLO equity fundraising rush with $400 million target
Fundraising for CLO captive equity funds is surging, with Ares Management the latest manager to win capital for such a strategy. Sources say the Los Angeles-based firm is targeting up to $400 million for Ares CLO Equity Fund, which will invest in the control CLO equity and warehouses of future deals.
Ares has consistently priced around four US CLOs totalling around $2 billion for the past few years, according to CLO-i.
This year, it paired with Natixis on Ares LIX in March, priced Ares LX in May (Goldman Sachs) and Ares LXI (Nomura) late August. The manager also teamed up with Barclays in August on a US CLO named Ares Loan Funding I, a vehicle that will invest solely in loans.
With Ares working to an average deal size of roughly $500 million, the new CLO fund should be able to support the issuance of eight US CLOs.
Ares is one of several managers this year to launch such funds. Creditflux reported that debut CLO manager Sycamore Tree was targeting $300 million for a captive equity and mezz fund, while Denver-based ArrowMark hit the road with ArrowMark CLO Equity Strategic Partners Fund. It will invest in the equity of its Elevation branded CLOs.
In April, Post Advisory Group, which debuted in CLO management in 2018 but had only priced one CLO, hinted at ending a three year-absence after launching Post CLO Equity Fund. The manager then priced its second new issue three months later, Post CLO 2021-1.
In March, Angelo Gordon launched AG CLO Equity Fund, while Kayne Anderson and GoldenTree Asset Management kickstarted the year by closing their captive CLO funds.
Dispersion trades in play as transatlantic rift opens
The return of idiosyncratic risk at the wide end of US and European high yield markets has put index equity tranches for the two jurisdictions on noticeably divergent paths, say correlation traders.
The iTraxx Crossover five-year 0-10% equity tranche widened five points in the early part of October, to 52.75 points, before returning to 50.75 at time of press. By contrast, CDX HY five-year 0-15% ended the month flattish, around 47 points, despite an initial 2.5 point widening.
“HY equity was underperforming other tranches, largely due to Talen Energy, and now gave back some of it because Talen rallied 10 points lately,” say one portfolio manager in New York. “Crossover on the other hand had Adler and Casino driving it the other way.”
Talen Energy Supply, a private equity-owned power producer in Texas, deteriorated for much of the first eight months of 2021 and was quoted at 70.5 points-up-front in five-year CDS on 25 August. That implied an expected recovery on bonds of less than 30 cents if the company defaulted on its debt. Since then Talen has rallied back to 52.75 PUF.
German company Adler Real Estate had likewise been a poor performer for much of 2021 and hit a wide of 731bp on 6 October. It has since improved to 465bp, but retailers Casino and Iceland have been stepping out, at 715bp and 646bp respectively.
Crossover was at 253bp at time of press, while CDX HY had returned inside 300bp.
Market seeks new ways to find talent after hectic year
There are growing calls for more people to work in the CLO industry after a record-shattering 2021, with 999 CLO transactions having priced globally worth $447.17 billion, as Creditflux goes to press.
But sources say it’s becoming increasingly difficult to poach junior analysts from the sell-side with banks paying up for their junior credit staff. “This is a US trend that has crossed over into Europe,” says a London-based recruiter. “This had been a tried-and-tested way for the buy-side to expand, which they found attractive because of the rigorous training regimes that banks employed. But it’s becoming expensive to hire from the sell-side, so we’re seeing a lot of moves between fund managers.”
Fund managers have also targeted candidates from advisory firms, but again, it is becoming difficult to match wages in this sector.
The talent drain is exacerbated by the fact that several banks have outsourced analysis functions to other parts of the world, says the head-hunter.
To counter this, several large CLO managers are understood to have prioritised graduate recruitment schemes. This gives candidates an overview of the credit markets generally as they move across departments before settling on a defined role.
FCA draws up new fund structure for long-term assets
The UK’s Financial Conduct Authority has finalised a new fund structure that is designed to make it easier for defined contribution pension plans to invest in long-term assets.
Dubbed Long-Term Asset Fund (LTAF), the FCA-regulated fund will restrict investor liquidity so that redemptions are permitted no more frequently than monthly, and there is at least a 90-day notice period. This should allow LTAFs to buy illiquid or long-dated assets, including private equity, infrastructure, private debt and real estate assets. LTAF funds will adopt an open-ended structure.
Chief executive officer of the FCA, Nikhil Rathi, says: “If this innovative fund structure, created by our rules, is taken up by the asset management industry, it may provide alternative routes to returns for investors, while supporting economic growth and the transition to a low carbon economy.”
Until now, fund managers have taken it upon themselves to create fund structures for defined benefit pensions, with BlackRock, MV Credit/Loomis Sayles and Tikehau/DWS assembling credit offerings this year.
The latter fund takes in 100% of commitments on day one and aims to return 60% of capital within five years.
Energy crunch grows as differentiator for EM and western credit
Surging energy prices are adding to the inflationary picture in global economies and point to a mounting crisis that could bring sharply divergent performance for different parts of the credit market.
WTI oil was $84.17 a barrel at time of press, more than double where it traded a year ago. While beneficial to producer countries and energy companies, the rise stems from supply squeezes and has exposed weaknesses in various countries’ preparedness to reopen economies after covid-19 lockdowns.
“We see persistent supply constraints and oil prices continuing to go higher, which is likely to hurt energy-dependent sectors as well as commodity importing countries,” says one portfolio manager in London.
China’s energy shortfall has drawn headlines due to the likelihood this will impact economic growth there. “We are not extremely worried about China, as we see dovish signs from the government,” says the PM. “We see China 2022 GDP growth closer to 5%, but not below.”
But the picture across emerging markets is becoming increasingly complicated. Even though Brazil is an oil producer, a drought in the Parana region has halved its hydroelectric power production, also spelling energy rationing problems for Argentina and Paraguay.
Developed markets are not spared either. EU gas prices have risen by 170% since the start of 2021 and ministers were called to emergency meetings on 26 October amid divisions on how to tackle the crunch.
“Inflation rates have once again been higher than the ECB’s projections, and higher energy prices and supply chain frictions are clearly complicating the ECB’s life,” wrote ING economists in a note.
Euro CLO triple As to tighten as new investors enter
CLO market participants anticipate European CLO triple As will grind tighter over the coming weeks as new buyers gobble up paper.
data shows spreads have tightened from an average 102 basis points in September to 99.5bp in early October. KKR’s Avoca CLO XXV priced at 96bp on 20 October.

Most of the recent run of triple As, double As and single As have been locked in. But as Creditflux goes to press, CVC is marketing a Cordatus deal at 94bp while BlackRock XII is also being guided at 94-96.
One CLO investor says the tightening is due to new buyers. “We’ve heard there are new buyers of European triple As that aren’t investing in the US, but are looking at triple As on a relative value basis,” she says. “If you think about that, it’s still an attractive investment whether triple As are 98bp, 95bp or 90bp.”
A syndication specialist confirms this and says several investment mandates have gone live over the past few weeks, coming largely from continental banks and insurers. The official says resets may not benefit from the influx of capital as most buyers are looking at new issues.
At the mezzanine level, spreads have held firm in contrast with the broader volatility. Triple Bs have seen strong demand, with some deals printing as tight as 300bp, which sources say is coming from real money bids for entire tranches.
Sinking Euribor floor brings CLO relative value into play
The collapse in the value of the Euribor floor over recent weeks, which reflects inflationary pressures, may lead to global CLO investors favouring US CLO paper on a relative value basis.
Five-year intrinsic Euribor floors have dropped 25 basis points from the end of August to around 13bp, sources say.
Stephane Michel, senior fixed income portfolio manager at Federated Hermes, says the contribution to the implied discount margin depends on the assumptions around the effective life of the deal. The decline in floor value at the shorter end of the curve, however, is subtler.
“For deals that get refied or reset at the first opportunity, this is still around 40bp — albeit a drop of 7bp versus the end of Q3,” he says. “But the impact of the rate curve change is more pronounced if we assume a longer average life on the transaction, with the floor now being worth only around 10bp, while it was worth around 40bp at the beginning of the year.”
He says, assuming curve changes are now done, shorter bonds provide more value from the floor on a carry basis. They are, however, more exposed to further increases in rate expectations. Longer duration bonds will benefit if the market decides the recent move is an overshoot and have less to lose in case of an uptick in the short end.
Another CLO investor tells us that the floor collapse also means that US CLO paper looks cheaper than Europe. “US triple As are pricing at 115bp, while European triple As are at 94bp plus around 10bp of floor.”
However, as Deutsche Bank’s CLO research team points out, five-year USD/EUR currency basis is around -7bp (from around -4bp in June), which should offset the rates move.
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Global credit funds & CLO's
November 2021 | Issue 240
Published in London & New York.
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