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May 2022 | Issue 245
News
Tech firm eyes data-driven approach to CLO management
Tech firm eyes data-driven approach to CLO management
Sayed Kadiri
Editor
As New York-based tech firm Exos prepares to launch what it calls “the first truly tech-enabled CLO”, the specialist leading its efforts says technology could soon play a central role in CLO portfolio optimisation.
“A CLO is a big, linear programme that you want to optimise while protecting debt,” says Faris Saah, who is spearheading Exos’s CLO plans. “We have constraints based on indentures, but we can use technology for portfolio optimisation to create a CLO pool with high weighted average spread (WAS) and low warf.”
Saah, who served as the head of credit research at Blackstone Credit earlier in his career, says Exos’s model portfolio has a WAS of 400bp and warf of 2,400. Both figures are among the best in the CLO universe, but given that they have competing characteristics, attaining them on the same CLO is unparalleled.
Saah says the underlying loans have sufficient bid-depth that the model portfolio need not remain purely hypothetical.
Saah has a distinct philosophy for his CLO platform. He wants it to take concentrated positions, with greater exposure to second lien loans than is usual.
“Most CLOs have 350 issuers and I think that is over-diversified — you should not be afraid to hold more than $1 million in one credit,” he says. “We also think that second lien loans are under-utilised in CLOs as you are often fairly compensated for taking on additional leverage risk by a huge pick up in spread.”
“We think second lien loans are under-utilised in CLOs”
Faris Saah, Portfolio manager | Exos
Saah says he would forego a bond basket and exposure to triple-C credits, so long as he can invest in second lien loans. Although, even then, he thinks a 2.5% allocation is fair, versus a 0.8% market average.
People will form a key part of the Exos operation, with portfolio manager Saah looking to hire analysts.
“Machines are not making decisions,” he says, adding that the onus is on analysts to put forward trade ideas. He also says analysts in his team will be rewarded for trading gains.
Exos plans to gather unconventional data to support its CLO. Saah gives the example of using drones to monitor footfall at retailers to give a measure of how a company is performing.
It is hoped that such data streams will give analysts more tools to generate trade suggestions. “At most CLO firms, staff spend 50% of their time writing financials,” says Saah. “That’s a huge drag on capacity.”
The Exos investment philosophy is enabled by the firm’s proprietary machine learning tool, Claira, a natural language processing application that works on legal documents.
Although a mandate has not yet been assigned, the Exos CLO could price this year.
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Global credit funds & CLO's
May 2022 | Issue 245
Published in London & New York.
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