Global credit funds & CLO's
April 2020
| Issue 222
Published in London & New York.
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April 2020 | Issue 222
Structured credit dragged very wide — but CLOs stand to gain
Sayed Kadiri
Evis Progonati, Debtwire
Senior tranches of securitisations widened 220% in less than a month as the coronavirus pandemic has meant an increase in systemic risk — a sharp turnaround from the past few months when idiosyncratic risks were being cited as the main concern for structured credit investors.
CLO triple A spreads have not fared well, widening 246% in the US and 226% in Europe (see table). But CLOs are managed vehicles so managers can hope to make trading gains over the coming months to build par. “We’re looking at recalibrating our models,” says Jonathan Sloan, a CLO specialist in Houlihan Lokey’s portfolio valuations team in New York. “CLOs with longer reinvestment periods can take advantage of this loan market, which could be highly accretive to CLO performance.” There has been limited trading of US CLO equity tranches over the past month, but sources say bids for these positions are in the teens, while CLO double Bs are in the 40s.
“There has not been a lot of CLO equity changing hands in the secondary market and that’s a positive sign” says Sloan, alluding to the lack of forced selling. “There are some public funds holding CLO equity, but even then if valuations fall the likely course of action is that these funds don’t pay an equity dividend rather than any liquidations.” Europe, described as the epicentre of covid-19, has seen limited ABS trading, but indicative spreads have reached 2013-14 levels in certain asset classes and jurisdictions. Spreads for ECB eligible senior Italian ABS widened to 150bp from 60-70bp at the end of February. Even with the all-encompassing measures announced by the Italian government through its Cura Italia (Heal Italy) decree, the Bank of Italy and the European Central Bank, trading of Italian ABS remains non-existent. Italian leasing ABS spreads doubled to 180bp DM, Italian senior RMBS spreads widened by 85bp to reach 200bp, while longer dated triple Bs jumped to 450bp from 245bp. Similarly, ECB-eligible Spanish ABS widened by 70bp from the beginning of the month and by over 80bp for Portuguese bonds. In the less liquid Greek ABS sector, spreads doubled to reach 500bp, levels the country has not seen since December 2017 when the government took resolute steps to tackle its non-performing loans burden.
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