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Global credit funds & CLO's
April 2022 | Issue 244
Published in London & New York.
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April 2022 | Issue 244
Event CLO summit
Sofr, so complicated
At Creditflux’s US CLO Summit debate centred on Libor and Sofr. Hot topics included tenors, Libor floors being out-of-the money and investors changing their views on spread adjustments
“The delta between three-month Libor and one-month Sofr is at its highest”
Stephanie Walsh
Portfolio manager, Bain Capital Credit
Generally, investors are looking at the delta between three and one-month Libor at 51bp. But as more loans transition to one-month Sofr, older CLOs face a challenge as the delta between three-month Libor (on the liabilities) and one-month Sofr (on a growing portion of assets) has reached 67bp.
“It’s a whole new horizon”
Gretchen Bergstresser
Global head of performing credit, CVC Credit Partners
At the end of last year, high yield companies had healthy margins. But things have changed in 2022 because of price rises in energy and commodities.
“We priced a European CLO just before the invasion…”
Brad Larson
Head of CLO new issues, Credit Suisse
Credit Suisse priced a European CLO the day before the invasion, and Larson conceded it would have been difficult to keep the deal together if the deal had priced a day later. Still, an investor needed approval post-pricing and although this came through, he believes further Russian escalation could stall the CLO market.
“You would have to do an annual audit, quarterly report and fee disclosure”
Richard Reilly
Partner, DLA Piper
CLOs will become more expensive under the SEC’s proposed private credit fund regulations. On top of the administration, fee rebates may have to be disclosed.
“The manager has to be a politician”
Sean Solis
Partner, Milbank
Some CLO documents give managers discretion on whether or not to flip their liabilities from Libor to Sofr. But debt and equity have opposing views on this.
“It’s caused a one-month/three-month problem, a Libor floor problem and has changed the economics”
Jason Friedman
Global head of business development & strategy, Marathon Asset Management
The sharp rise in three-month Libor from 18bp to 98bp has meant Libor floors have lost their value. 30bp of spread, levered 10-times, means equity investors stand to lose 3%.
“One of the hottest calls we get is for rated-note funds”
John Timperio
Partner, Dechert
Asset managers are taking private credit assets, putting them in funds and issuing rated liabilities to insurers.
“I said people would change their tune, but it happened quicker than I expected”
Amir Vardi
Head of structured credit (credit investments group), Credit Suisse Asset Management
CLO debt investors wanted an adjustment that was closer to the recommended 26bp when the spot basis between three-month Libor and Sofr was well below that figure. But CLO equity investors felt 26bp was off market and advocated an adjustment closer to the spot basis. Now the spot basis has reached 35bp, debt and equity investors are taking the opposite sides of their original argument.
“Some borrowers are extending out”
Gretchen Lam
Senior portfolio manager, Octagon Credit Investors
Although one-month Libor is cheap versus three-month Libor, issuers are going for longer tenors, perhaps factoring that they expect rates to rise faster than is being priced in. 55% of Libor loans are linked to one-month and the remainder to three-month, but last year the breakdown was two-thirds to one-third.
“We approached almost every transaction like hand-to-hand combat”
Dagmara Michalczuk
Portfolio Manager, Tetragon Credit Partners
Tetragon did not adopt hard-wired Sofr language into the CLOs where it bought the equity. It was difficult to convince debt investors to agree to this, but Michalczuk was against the 26bp recommended adjustment, which was based on historical data. Who prices financial assets looking backward?
“Some mezzanine classes are having a say in CLO amendments”
Algis Remeza
Associate managing director,
Moody’s Investors Service
It’s not just senior debt and equity investors who dictate CLO documentation.
“Folks will write paragraphs and paragraphs to answer a yes or no question”
Ronni Neeman
Principal and global head of CLO research, PGIM
A lot of the ESG standardisation initiatives are centred on qualitative approaches, which makes it difficult to compare between issues.
“ESG-labelled CLOs are 3-5% of the market”
Terry Ing
Co-head of high yield and research, KKR
ESG CLOs are a small but growing part of the market. One of the departments in KKR fielded more questions on ESG in the past quarter than they had in the previous five years.
“The good news is that credit could not have been positioned better”
Christina Padgett
Associate managing director, Moody’s Investors Service
Before the chaos of 2022, loan issuers were in good shape with great liquidity and maturity profiles.
“We are evaluating whether to move into secondary CLO equity”
Nicole Byrns
Managing director in Americas structured credit and financials, CPPIB
CPPIB is looking to expand beyond new issue CLO equity.
“We have reservations about signing up to a single-manager CLO strategy”
Phillip Falk
Investment director, NEPC
Captive CLO equity funds mean a higher concentration risk.
“Who is looking at the underlying financial statements?”
Colleen Mattern
Director in financial markets, PWC
Mattern questions how some firms might be tracking ESG performance from corporates on an ongoing basis to verify statements. If there is little attention paid to this, then it should perhaps not be referred to as a key performance indicator.
“We advocate a dedicated, evergreen exposure to CLO equity”
Christopher Acito
CEO, Gapstow Capital Partners
This means buying CLO equity over time, rather than buying every deal that is pitched. Most pension funds, however, do not see things this way.
“We are leveraging our PE relationships to get preferential loan allocations for a CLO warehouse-type format”
Michael Phillips
Head of credit and special opportunities, Teacher Retirement System of Texas
Phillips describes the loan investment platform established with CIFC Asset Management, noting the intention to turn this into a CLO programme.
“This is almost a goldilocks scenario for CLO equity”
Debdeep Maji
Portfolio Manager, Oxford Funds
Maji says most performing loans dropped from 100-99 to 97 cents during the dislocation in March, but portfolio tails have not lengthened. This makes short-dated equity attractive as it has sold off sharply, and conditions in the loan market suggest these positions will bounce back strongly.
“There is more liquidity in CLO triple As because of ETFs”
Unmesh Bhide
Chief Product Officer, Pricing Direct
Janus Henderson and Alternative Access each launched CLO ETFs in 2020 and this has added depth to the buyer base for CLO first-pays.
Would you buy it?
Deep River CLO 2022-1
- $467 million new issue US CLO
- Three-year reinvestment period
- Mid-tier manager with 30 CLOs
- Wide pricing with triple As in high 140s
- Features a split triple B; seniors at 345-355bp and juniors at 540bp
“Shorter duration is generally less attractive”
Robert Klein
Chief investment officer, Clarion Structured Credit
It can take a new issue time to burn off the initial expenses involved with setting the deal up, so a three-year CLO does not look as attractive as a five-year deal.
“I would want to see the tails of the portfolio”
Denise Crowley
Structured credit investments, Zais Group
Looking at the underlying portfolio is crucial in this case. A deal such as this would have to be largely ramped to do a thorough analysis, where the focus will be on dispersion, which is growing.
“The junior triple B is a great insurance bond”
Tim Wickstrom
Executive director, Panagram Structured Asset Management
Manager tiering is evident here as the debt is pricing wide of some five-year reinvestment paper. The wide liability pricing makes the debt attractive, particularly the senior and junior triple Bs.
“This is a
function of the entry point”
Michael Kurinets
Chief investment officer, Capra Ibex
To make the yields comparable to a five-year CLO, equity has to be created at an attractive price and the only way that can happen is if assets are sourced at a good price. You could create equity in the mid-70s, but it would need to be lower to be attractive.
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