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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 Credit dimensions
That’s another fine mezz I’d like to get into
Structural protection and flatter curves make short-dated mezz tranches attractive. Speakers at Credit Dimensions discuss which positions they’d take in CSOs, options and tranches this year
“There is always discussion on whether we want to protect our CLO investments”
Greg Borenstein
Head of corporate structured credit, Ellington Management Group
As a hedge fund, Ellington is always looking at relative value. Borenstein says CLO mezzanine tranches are typically issued at par, but are negatively convex and there is not much of a roll down. In synthetics, there is a clearly defined roll down. JP Morgan’s Peng goes on to say hedging CLOs with tranches has been a big trend in the last year or so.
“We’d use carry from bespoke mezz to buy index protection”
John Burkert
Head of direct credit, Duke University Management Company
Burkert is not a fan of CSO equity at the moment and describes how he would hedge against defaults rising. In index tranches he prefers to be short mezzanine or equity tranches versus the index.
“We have seen ‘senior’ CLOs”
Charles “CJ” Martino
Global co-head of credit and capital solutions group, JP Morgan
SRTs are a cross between CLOs and CSOs, but they tend to have exposure to revolvers and term loan As. There have been deals featuring CLO names only, creating something that resembles a high quality CLO. CJ says his team seeks to find the right homes for risk and in March 2020, as revolvers were getting funded and extended, they emerged as a good fit for CLOs.
“We did a lot of equity in funded format”
Guillaume Mear
Head of structured credit & financing, BNP Paribas
Last year, funded equity tranches emerged in CSOs. Mear says there was roughly $10 billion of CSO volumes in 2021, mostly in the primary market. Year-to-date that figure has already been reached.
“We like the
15-25% tranche”
Yuan Peng
VP in global macro credit & correlation trading, JP Morgan
Going long mezzanine tranches is an effective way of capitalising on rising dispersion. In this case, mezz should outperform equity and, in a macro sell-off, junior mezz will become positively convex, protecting against tail risks.
“Negative screening reduced the investible universe by 15%”
Andreas Ross
Head of new product research and development, Zais Group
Ross describes Zais’s ground-breaking ESG CSO, noting that after the negative screen the firm used a positive screen. 167 names emerged from this and this was filtered down to 120 names with a high weighting towards banks.
“IG tranches can be a recession hedge”
Kelley Baum
Head of credit derivatives, III Capital Management
Junior mezzanine IG tranches are structured as 3-7%, versus 15-25% in the HY tranches. It would take problems in a couple of sectors and IG mezz could move quickly. Taking an equivalent delta-hedged position in junior HY mezz means factoring the likelihood of defaults and how this will hit the high yield delta before it hits the mezz tranche, but that is less of a risk in IG.
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