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News Investor’s Corner
‘This is a perfect storm for the loan market’
Lisa Lee: I’m with Michael Sobol, global head of investing at Blackstone. So tell me what you do.
Michael Sobol: I’m part of our CLO business, where we have a USD 75bn global CLO franchise. Specifically, I head up our CLO investment team. We invest up and down the capital structure from triple A to CLO equity.
LL: The arb is really tight. How do you invest in that kind of a climate?
MS: I’ve recently used the phrase, “a perfect storm” for the loan market with regards to CLO equity investing. It’s not an unfamiliar concept to people who are involved in our market. What I mean by that is the continuation of a bifurcated market, where we have 85-90% of the market that is par or potentially higher, and you have 10-15% of the loan market that is in a stressed position, either through price, spread or rating.
When you think about investing in CLOs, you must use a lens where this market could continue this theme, and further potentially exacerbate where the performing credits are going to continue to refinance, and the underperforming credits in the stressed basket could look worse on a mark-to-market basis.
With that view, we have been conservatively positioned to have more exposure on a look-through basis to the better performing part of the market. We have been focused on owning the higher-quality portion of the loan market on a look-through basis in CLO tranches. Therefore, we think that because of a compressed credit environment, this should outperform relative to the entire market over the next six to 12 months.
We focus on capital preservation as a thesis for our CLO equity investments
Michael Sobol
Global head of investing
Blackstone
LL: We’ve had a bout of volatility in the loan market. Are you worried?
MS: I believe you’re asking about the software sector. We think that’s a sector which has several knowns and unknowns around it. As a CLO investor, you must be very thoughtful with the risks and exposures you have, where they’re currently trading, and then ultimately what that could mean for your CLO investment on a look-through basis.
I would say that, in general, we’ve seen CLO MVOCs or CLO equity NAVs decrease because of this price action. Does that follow through to trading levels and spread widening on CLO tranches? It most likely will. Specifically, within the BB and CLO equity tranches.
LL: We’ve seen some big credit bust-ups. So what do you do as an investor when something like that happens? Do you call your managers?
MS: Absolutely. First and foremost, having real-time information is critical. Even though CLO information is updated monthly, real-time market data daily helps to form a clear picture.
One of the reasons why CLOs have matured and are able to offer daily liquid products, is because of the technology. The technology that’s been built for the asset class has grown so rapidly over the past few years. The access to information and the confidence in that information is what has driven growth and further maturation.
When you ask, “Do we get on the phone with a CLO manager when a single name goes bad?” Yes, we do. But hopefully we’ve been ahead of that with the manager and their rationale for being in that name or in that sector prior to the event.
LL: If this is the perfect storm for CLO equity investing, how do you navigate it?
MS: I think it’s really hard. The structure of the loan market makes it hard. This is as difficult a market as I’ve seen for CLO managers. We used to see more orderly price movements on loans. Now loans tend to gap down, or up, on small news or trade volumes. The transparency and real-time information I mentioned earlier can also act as a double-edged sword, where CLO investors can observe it all.
CLO managers are constantly being compared to one another, and which manager is top tier can change frequently. Therefore, we focus on capital preservation as a thesis for our CLO equity investments, and will continue to do so.
