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September 2021 | Issue 238
Déjà vu as CLO strategies again top hedge fund tables
Seven out of the top 10 funds in our hedge fund tables belong to the CLO category as the asset class outperformed again in July.
Hildene Credit Fund topped the rankings after the CLO fund gained roughly 3.45% to take its year-to-date returns to 26.05%.
On average, funds that invest in CLOs have gained 10.06% so far this year. US CLO funds managed by CIFC Asset Management and Flat Rock Global also made the top 10 for July, as did European CLO strategies run by Alegra Capital and Lupus Alpha Asset Management.
On average CLO funds gained 1% on the month, while high yield funds were the weakest performers, gaining a measly 0.13%.
US pensions make even more space for private debt
US public pensions are increasing allocations to private debt with sources indicating that the resilience of the asset class during the covid-19 pandemic has accelerated the trend.
Teachers’ Retirement System of the State of Illinois, for example, recently added a potential future $1.3 billion allocation to private credit following the completion of its asset allocation study.
The $63 billion pension increased its target for the income bucket — which includes private credit and fixed income — from 21% to 26% at its 12 August board meeting. It also disclosed nearly $1.5 billion in recent credit commitments.
Fresno County Employees’ Retirement Association meanwhile could also increase its private credit target, according to an asset-liability study conducted by investment consultant Verus. The $5.9 billion pension has an 8% target to private credit, but this could increase to 10% or 12% ($703 million), depending on prospective portfolio mixes. As of 31 March, the pension had a 7.4% actual allocation to private credit, which includes allocations to Colony Distressed Credit III, CVI Credit Value Fund III and KKR Mezzanine Partners.
Commenting in Creditflux and Debtwire’s upcoming Q3 2021 European direct lending report, Blair Jacobson, co-head of European credit at Ares, said the pandemic proved the soundness of the firm’s direct lending underwriting process.
“When investors and borrowers saw how well the asset class responded to the impact of covid as it played out month over month, it gave them a lot of confidence in the downside thesis of the asset class,” he says.
Irradiant plans to shine with first CLO after spin out
The former Kayne Anderson CLO team is preparing its first deal after spinning out, with market sources indicating it is working with Goldman Sachs on a new issue CLO.
The new asset manager has been named Irradiant Partners, sources say. As first reported by Creditflux, the founding team includes former Kayne chief executive officer Michael Levitt, head of liquid credit John Eanes, and head of opportunistic investments and co-head of renewable infrastructure Jon Levinson.
Reports suggest Irradiant will invest in renewable energy, but the bulk of its $6 billion starting assets under management is centred on US CLOs.
Irradiant has 11 CLOs to its name, the most recent of which priced in March. While at Kayne, the Irradiant team raised a captive CLO equity fund to support future CLO issuance.
The new Irradiant CLO is anticipated to price in September, with sources indicating that a majority of the equity tranche has been accounted for.
Los Angeles-based Eanes is credited with being the key figure when Kayne moved into CLO management in May 2018. He had joined the firm a year earlier from Ares, where he had served 10 years.
After the spin out, Kayne was left with about $28 billion of assets under management. It reacted by appointing Albert Rabil, CEO of its real estate business, as overall CEO.
Reversal brings Chinese outperformance in credit
Credit market improvement hit an impasse in most jurisdictions during August, with range-trading in Europe, the US and much of emerging markets. But Asian credit, and Chinese markets in particular, enjoyed a strong run.
Before August, the underperformance of Chinese credit had been gaining attention. Concerns about a slowdown had been lingering as the government clamped down on booming sectors such as technology and education, and talked about redistributing wealth.
But the widening trend reversed in August. A rally gathered pace mid-month as the Chinese government bailed out troubled asset manager China Huarong.
Despite posting a near-$16 billion equivalent net loss for 2020, five-year CDS referencing China Huarong International Holdings ended the month 17 points better in up-front trading, according to IHS Markit.
This improvement helped drive the iTraxx Asia Ex-Japan index in by 20bp from the start of the month, to 71.75bp on 25 August. Other big index constituent improvers included China Cinda HK Holdings, which came in 72bp to 152bp.
TriMark court ruling encourages peace between lenders
Many CLO managers breathed a sigh of relief in August, with one source indicating a recent court case decision sent a “clear signal that the spate of lender-on-lender violence in the leveraged loan market will not remain unchecked”.
TriMark’s super-priority US loan transaction sparked widespread debate among the CLO community last year, as it effectively left the debt of some minority existing first lien lenders subordinated without their consent, while also stripping them of rights in existing credit agreements.
TriMark, which is owned by private equity sponsors Blackstone and Centerbridge, cut a deal with majority first lien lenders, including Ares, BlackRock, Blackstone Credit and Sculptor, giving them priority over minority first lien lenders. Minority lender plaintiffs in the case include, among others, Assured, Audax, Golub, ICG, New Mountain, Romark, Shenkman, York and Z Capital.
The majority lenders sought to dismiss the case. They argued that certain barriers blocked the plaintiffs from bringing the suit, and that the restructuring of TriMark’s debt complied with the governing contracts.
Justice Joel Cohen denied the defendants’ motion to dismiss the core contract claims on 16 August, noting “sacred rights” that require unanimous consent to change the relative priority of TriMark’s lenders’ rights to shared collateral. As a result, the minority lenders can continue with their litigation.
Creditflux reported in November that Tetragon Credit Partners was working on adding concentration limits to CLO documentation to restrict investments in loans that allow for similar restructurings.
Rising stars vie with swooping hawks as Fed deliberates
Rising star companies moving from high yield to investment grade could be a valuable source of returns for credit investors in coming months, say sources. But with corporate leverage back to pre-covid levels, US Federal reserve messaging on asset purchases and rates looks set to be a bigger driver of performance.
Focus was firmly on the upcoming Jackson Hole meeting as Creditflux went to press, with investors ready to scour speeches for any sign of when the Fed may begin tapering.
The consensus among economists has turned to November as the most likely date. There remains the prospect the Fed could move at its September meeting, but this was thought be less likely once the Jackson Hole symposium was switched to an online one-day format due to delta-variant covid restrictions.
In his latest credit research, BNP Paribas global credit strategy head Viktor Hjort projects $112 billion of rising stars in the US and €31 billion in Europe over the next 12 months.
“Rising stars historically offer 30-35bp of outperformance versus triple Bs,” he says. “High cash balances mean corporates remain default-remote and supply should remain manageable.”
US high yield index CDX HY is due to roll to a new series at the end of September. Administrator IHS Markit had not yet published provisional changes at time of press, but 15 index constituents have an implied rating of triple-B and one — Norbond — single A.
Taliban takeover likely to have long-term credit impact
Afghanistan’s takeover by the Taliban has barely caused a ripple in credit even regionally, but the power shift has wide-reaching implications that investors have yet to take onboard, say frontier market specialists.
Afghanistan’s biggest implications for international markets concern a regional transfer of influence away from the Pax Americana towards China. The capabilities and interests of China are “critically different compared to when the US led forces into Afghanistan in 2001”, according to Hasnain Malik, an emerging and frontier markets strategist at Tellimer in Dubai.
“In the vacuum left by the US, the alignment of China, Pakistan — with potentially Russia and Iran, too — and the Afghan Taliban around shared interests, or common enemies, rather than shared professed values, appears far stronger than any alignment of interests, rather than shared professed values, among the US, EU, India, and the Ghani-led Afghan government,” Malik says.
Taliban rule in Afghanistan also has consequences for the sale and control of minerals and other commodities on the international market. Lithium, iron, copper and chromite rank among the country’s known but largely untapped resources.
Financial market commentators have generally dismissed the impact of events in Afghanistan. Certainly US and European credit had some off-days around the Taliban takeover, but questions of Fed policy weighed more heavily and spreads have since rebounded.
But the US exit has raised concerns for Asian countries and investors about the long-term credibility of US security cover for far away countries that depend on it.
Investors clamour for fixed-rate CLOs ahead of rate rise
Demand for fixed-rate US CLO paper is so strong these notes are pricing much tighter than pari passu floating rate equivalents in the primary market.
“It’s a pure rates bet,” says a New York-based CLO structurer. He says that investors are anticipating an increase in interest rates as early as this month and are locking in ahead of that. This can mean accepting 25 basis points less in spread over the swap rate for a double A-rated CLO, compared to a floating rate bond with the same rating.
Blackstone priced Peace Park on 17 August with double As at 2.5%, which is 135bp over swaps compared to 160bp for the floating rate equivalent.
A similar dynamic is at play with triple As after MJX Asset Management priced Venture 44 on 17 August. The senior notes in that CLO priced at 2.14%, or 115bp over swaps. In contrast, the floating rate triple As came in at Libor plus 120bp.
Although CLOs now have the ability to hold fixed-rate bonds, sources say that equity investors are reluctant to sign off on fixed-rate liabilities. “They tend to limit fixed-rate notes to $15 million of a CLO’s liability stack,” says the structurer.
A forthcoming Blackstone CLO looks set to incorporate a fixed rate double A tranche. Nyack Park CLO is guiding these at 130bp over swaps, compared to 155-160bp for the floating rate note.
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Global credit funds & CLO's
September 2021 | Issue 238
Published in London & New York.
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