November 2021 | Issue 240

These CLO docs could be better

Sayed Kadiri headshot
Sayed Kadiri
It seems there’s not much to worry about if you’re in the CLO market. In Creditflux’s CLO Census, voters said docs should follow a template as Jefferies, AGL and Hayfin emerge as rising stars
There are no major regulatory headwinds facing the CLO industry, managers are printing CLOs on auto-pilot and there is growing appreciation of the CLO asset class. Which means, for once, there’s very little to moan about.
You know times are good when market participants pick CLO documentation as their greatest bugbear. Our CLO Census generated 244 responses from market participants (beating last year’s record of 222 responses) and 22.7% of respondents said they wished CLO docs would be standardised. This beat off perennial complaints about inefficient loan settlement times (15.15%) and streamlining CLO b-wics (10.61%).
Anchor CLO equity investors will be loathe to give up their list of CLO stipulations, but there is a school of thought that says CLO liability spreads will tighten if documents are more homogeneous because they will draw in more debt investors.
In fact, one CLO investor has cited Palmer Square Capital Management as an example of this. The firm runs a series of static CLOs, which the investor says has a clearly defined call schedule. This has resulted in the firm’s static CLOs printing tight, even accounting for the fact they are short duration deals.
Quite comfortable on this Sofr
If there was one thing that would cause CLO practitioners to fret, surely it would be the move from Libor to Sofr next year? Not so much. 82% said they were optimistic or not worried about the inevitable basis risk that would occur as some loans reference Libor and some Sofr.
CLO managers will be faced with the task of managing this risk and understandably, they are most concerned, with 22.9% feeling downbeat.
Despite Sofr basis risk ranking low in the list of worries, it was still the thing that voters were most worried about — perfectly encapsulating the positivity that is seeping through the market. Second and third on the list of worries were that things were going too well, and that there is nothing to worry about.
One voter declared disinterest in the Sofr issue, commenting: “Just pick a base rate and move on.”
* Creditflux CLO league tables 2021 Q3 YTD
ESG gains momentum
ESG investing is no longer solely a European phenomenon, with several US managers adopting ESG investment frameworks. The market is more accepting of this as a concept than a year ago, with 64.8% of voters agreeing that CLOs should adopt CLO investment guidelines, compared to 59% last year.
There was very little deviation on ESG across voter type, with bankers/traders, investors, managers and service providers each about two-thirds in favour of ESG CLOs. However, even those market participants that voted for ESG had their caveats. Several pointed out that there is still a lack of ESG data, while others noted that there is space for both compliant and non-compliant deals.
There are conflicting views as to whether CLOs should spearhead the ESG drive (the industry appears to have made greater advances than any other part of the credit universe). One voter said we should wait for the market to develop before creating ESG CLOs. This was countered by another respondent keen to take a proactive approach: “ESG is coming whether anyone wants it or not. Best to stay in front of it.”
There are a couple of CLO issuers who seem to be ahead of the curve. In Europe, NIBC was voted the most ESG-aware manager with 21.5% of the vote. The firm is widely regarded as having the most stringent and transparent criteria for its CLOs, and it produces regular reports on the ESG scores it assigns to each loan.
Partners Group is the leading light in the US, with 14.8% of voters backing the firm’s ESG US CLOs. The firm is headquartered in Switzerland and is relatively new to US CLO management, having broken through in 2018. Large CLO managers PGIM, BlackRock and Credit Suisse Asset Management and Neuberger Berman were all rated in the top five for ESG.
* Creditflux CLO league tables 2021 Q3 YTD
AGL and Hayfin going up in the world
The voting for best CLO market participants largely stuck to the script, with Citi and JP Morgan again dominating the tables for US CLO origination. But Jefferies has turned heads in Europe after having established its CLO arranging business late last year. It has been voted best at European CLO structuring and syndication (joint with Barclays).
Given the re-ranking of CLO managers since the coronavirus pandemic, we asked which CLO managers have gone up in people’s estimation. In the US, AGL Credit Partners was voted top — the firm was established in 2019 by Peter Gleysteen and has gone on to become a prolific issuer.
In Europe, Hayfin Capital Management is viewed as being on an upward trajectory. The firm has been rewarded for its performance this year, pricing two new CLOs at tight levels versus the market.
Very few would have expected Wells Fargo to have been toppled from its throne as best at US CLO research. But the departure of its CLO research head Dave Preston (to AGL) has caused the firm to fall to second place behind Bank of America.
Intex is another dominant firm. It has been voted best at CLO analytics each time Creditflux has run the Census. Although it once again finished top in the voting, a changing of the guard might be on the horizon, with competitors Kanerai and Valitana closing the gap in a competitive field.
The arbitrage is good
Those are four words rarely strung together — and they make the centre square of CLO bingo whenever a conference is in town. But for once, market participants agree — by a massive margin — that deal economics have been sound in 2021.
In the US, 88.7% agreed that arbitrage has been great, with Europe just behind.
  • The 2021 CLO Census was an online survey open for two weeks from 4-18 October.
  • We received 244 responses, compared to 222 in 2020.
  • We asked respondents to indicate if they were a CLO manager, investor, arranger, or service provider. We vetted responses line-by-line and eliminated all cases where companies voted for themselves, or for affiliates.
  • We would like to extend our sincere thanks to the CLO community for supporting this initiative.
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Global credit funds & CLO's
November 2021 | Issue 240
Published in London & New York.
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