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Global credit funds & CLO's
July 2020 | Issue 225
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July 2020 | Issue 225
Analysis CLOs
Trading places: it can pay to bet on the little guy
Charlie_Dinning
Charlie Dinning
Data journalist
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Tanvi Gupta
Head of data journalism
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It’s assumed investors know how good a CLO manager is by the rate at which they trade their way through a crisis. But this time five small, nimble managers are outperforming the market
Some of the smallest and newest managers were those that shone brightest during this period. AGL, HalseyPoint Asset Management, NYL Investors, Pacific Asset Management and Post Advisory Group were the only managers to build par over those two months.
New York Life is the most experienced of these managers, having issued CLOs for almost two decades, but it is a small issuer, with $3.1 billion of CLOs under management (making it the 76th largest manager in the US at the end of Q1 2020).
Clean portfolios help new firms
The other firms are recent debutants. AGL and HalseyPoint launched last year, so they benefited from cleaner portfolios. AGL achieved the largest par build from February to May, with a 0.7% increase in junior OC ratios. The New York firm traded 18.1% of its portfolio and had one of the lowest exposures to the downgrade wave. Pacific AM moved into CLOs in 2017 and Post followed a year later. Panellists on the Creditflux West webinar last month said the success of new managers will result in them moving up the manager tiering system.
In theory, 30 point gains courtesy of the pull-to-par effect suggests managers had ample leeway, but their trading tactics were dictated by how they were positioned before the coronavirus crisis and by their view on what constitutes a ‘covid sector’. Another factor is whether a manager wants to move into attack or defence.
A CLO equity investor says it is difficult to assess which trading strategy will ultimately pay off. “Loans have bounced back with some triple C credits above 90. In such circumstances, you might say that the manager would have benefited by hanging on, rather than funding other trades by crystallising losses on triple C names,” he says.
Ellington Management Group was the most active manager with respect to its portfolio size, after it bought $478.4 million of loans and sold $416.3 million in March and April across just four deals. The manager was among the worst hit by the loan downgrade wave, which saw $580.6 million of Ellington’s loans downgraded to triple C in those two months. Over this period, the average par value of the junior-most OC ratio in Ellington deals suffered by 5.68%.
However, Ellington has more capacity for triple C assets than most competitors, having pioneered triple C flex CLOs. Its deals have 50% triple C buckets and are among the few in the market to be passing this test.
Ares Management was the busiest trader by sheer volume — buying and selling $6.2 billion of assets in two months across 29 deals — trading 38.9% of its portfolio. On average, the manager suffered a par loss of 2.3% from February to May. Upon entering the crisis in March, 10.9% of Ares portfolios were exposed to loans that were downgraded to triple C in March or April.
PineBridge Investments positioned itself on the other side of the spectrum. It sold just $31.1 million and purchased $109.7 million of assets across 11 deals — just 2.8% of the manager’s portfolio in our dataset. But its par loss was lower than Ares at just 1.3%.
  • Manager portfolio trade %: amount bought and sold in March and April across all deals in data divided by total size of portfolio.
  • Manager change in OC: average of change in junior-most OC test result in deals from February trustee reporting date to May.
  • Downgrade exposure: % of February 2020 portfolio exposed to March and April corporate downgrades to triple C.
  • Data includes US CLOs which were within reinvestment period as of April 2020 and went effective prior to February 2020.
  • Bond flex deals, middle market and European deals are excluded.
  • Data sourced from CLO-i and Moody’s Analytics.
Methodology
Buying quality loans in the 70s is a once-in-a-decade opportunity, one which CLO managers grasped with both hands by trading $55 billion of assets over March and April.
US CLO portfolio trading vs change in OC (%)
T-Mobile was most purchased
T-Mobile USA was the most purchased loan in the time-frame as 670 CLOs bought $1.4 billion worth of paper at an average price of 98.7 cents on the dollar. Octagon Credit Investors was the largest purchaser with $121.5 million. $80 million of the T-Mobile debt was also sold at an average price of 99.3. CIFC was the largest seller.
Refinitiv US Holdings ($374.27 million) and Boxer Parent Company ($365.45 million) were the most sold debt issuers in March and April. Both firms are rated B3 by Moody’s. They were sold from CLOs with average prices of 95.4 and 83.8, respectively.
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