Global credit funds & CLO's
October 2020
| Issue 228
Published in London & New York.
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Questions will need answering about where a manager’s fiduciary responsibility lies
October 2020 | Issue 228
A fair-value bombshell in CLO land this month briefly rattled my nerves, but gave way to reassurance that the asset class has yet another argument to draw on about how it has become more robust.
Fair value at this time is hard to fathom in all walks of life, whether you are a usually self-employed Welsh tradesperson living off universal credit and grants, an office worker who can’t go into the office, or a UK prime minister strapped for nanny fees on £150,000 a year who has to walk through the office on his way to the rose garden.
Assessing one’s tax and expendables is harder still. You could be a fund manager in the higher bracket forced to get your hair cut by a visor-wearing neighbour, or a US president paying $750 in federal income tax and $70,000 on your UV bombarded head-fox.
My first big insight into the complexities of fair value came in childhood, when I helped a mate run a sweet stall at a fair. After several complaints from punters about the exorbitant mark ups we had placed on wares, the vicar marched over to preach that what we were doing was immoral.
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A university lecturer gives Welshcake a shock with a CLO presentation that points to shady trading games
Symposium’s shock revelation
Something of this memory came back to me when I watched a presentation on CLOs by Florin Vasvari, professor at London Business School, during September’s virtual Creditflux Symposium. The fellow almost casually introduced the idea that CLOs close to breaching over-collateralisation tests had been marking loans at much higher prices than those in safer territory. Not only that: he also suggested some managers were artificially boosting loan valuations by trading them between affiliated entities.
Well! The last time I sat up so quickly was when I dreamt Marmite was made from house spiders. The CLO revelation spoke of a big dent in an otherwise impervious edifice, even as the rest of the day’s agenda reiterated how well the products have served the purpose for which they were intended in a period of unprecedented stress.
Questions flooded my mind. Who should be taking oversight of this? Did it require regulatory intervention? What are the implications for investor confidence if we hit a second wave of coronavirus volatility and downgrades? Would inter-affiliate loan transfers be quashed? And should better-behaved managers strive quickly to distance themselves from the practice?
Introspection is still needed
Imagine my slowdown in pulse and cigarette smoking when it transpired the professor’s CLO data set was not, as I had imagined, from this year’s March sell-off, but rather US deals issued between 2008 and 2013. Many of these will have been redeemed, but in any case, it’s a long time ago in such a fast-maturing market.
The argument then becomes whether this is another area in which CLOs are doing better in this crisis than the last. The OC tests and other self-regulating mechanisms safeguarding stability are only ever more vigorous. Of course, the argument is only valid if data from current CLOs supports it, so investors should welcome similar analysis covering recent months. And then questions will need answering about where managers’ fiduciary responsibility lies, whether marking to the top of a range is justifiable, and what the accepted range for loans should be in times of extreme volatility/illiquidity?
One should never fear adverse analysis if it is accurate and we should always value heroes prepared to take on the status quo. Last month we sadly lost two champions of incisive thought with very different standpoints. Anthropologist David Graeber was no advocate of the markets we inhabit, but a great strength of his was going beyond ideology to tackle issues such as bureaucracy and workplace illogicality on a personal, issue-by-issue level.
Harold Evans, former editor of The Sunday Times, was a man of Welsh stock whose Essential English for Journalists should be a bible for Creditflux reporters and anyone wanting to convey their thoughts with optimal impact.
As for me, CLO tremulousness temporarily assuaged, fair value thoughts return to new series 35 CDX HY index equity tranches. Funny how falling angels, US presidential wrangles and rising default projections can feel like comfort food.
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