Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2024. All rights reserved. Available by subscription only.
News
Shenkman sees opportunity in ‘volatile, liquid bond market’ as it launches CBO
by Tom Davidson
CBOs have a history as long as CLOs, but after the poor performance of the first CBOs more than 20 years ago, the asset class was eclipsed by its loan-holding brethren. Since then, CBO issuance has been sporadic, with the last handful of deals hitting the market in the first half of 2022.
Shenkman, a long-time specialist in the market, believes that should change — and at the end of July priced Romark Credit Funding III.
Justin Slatky, CIO of Shenkman thinks Romark III could be the start of a wave of issuance. “CLOs are designed to take a relatively lower risk asset class and add leverage to create excess return,” he said. “We believe the bond market is now set up to do something similar.”
Capturing volatility can create excess return
Justin Slatky
CIO
Shenkman
For that to happen, investors will need to understand that although CBOs look similar to CLOs, they should be managed in a very different way. Jordan Barrow, co-head of liquid credit at the firm, said: “One of the biggest benefits of the bond market relative to loans is that the asset class is more liquid. With a lower levered vehicle and a more liquid asset mix, you can build excess par by repositioning the portfolio when volatility picks up.”
A second factor for Barrow is the impact of ETFs as a liquidity provider. When the market moves lower, he believes ETF sales may create the opportunity for CBOs to build par by buying discounted assets.
Investors with long memories will be relieved to learn that the new round of CBOs are very different from the first attempt.
David Lerner, Shenkman’s head of structured credit, said: “1.0 CBOs in the late 1990s suffered from a structural mismatch in interest rates — incorporating floating rate liabilities to buy fixed rate assets — and weren’t set up as trading vehicles. CBO 2.0s have been structured to alleviate this concern by issuing fixed-rate liabilities, and by using less leverage to facilitate trading.”
Slatky declined to give a firm issuance target, but said: “We would anticipate being very active in the CBO market to the extent the high yield market remains higher quality and capturing volatility can create excess return.”
