Global credit funds & CLO's
January 2020
| Issue 219
Published in London & New York.
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January 2020
|
Issue 219
News CLOs
Volatility wave brings index-linked CLO funds into play
Hugh Minch
Reporter
Defensive positioning from loan managers has led to bifurcation in that market, but CLO fund managers are taking an attack-minded approach with ‘index-linked funds’.
US CLO double Bs averaged 806.54bp in that month, compared to an average of 723.2bp across the third quarter of 2019. This spread widening occurred just as loan dispersion affected the underlying loan market.

Index-linked funds are also known as accordion strategies and these were advocated by Paamco credit portfolio manager Putri Pascualy at the Creditflux CLO Investor Summit in New York in November (Read
Attack is the best form of defence
).

Some credit managers believe that the long-awaited downturn is underway, which would create an ideal entry point for index-linked funds. “We believe we are in the early stages of a fundamental-driven credit cycle downturn,” says the head of structured credit at Pretium Partners, Jerry Ouderkirk, citing above average leverage, cross-industry technological disruption and changing consumer preferences. “Unlike previous cycles, we expect loans and structured corporate credit to lead the market volatility, as opposed to the high yield market we have seen historically.”
Pretium has reduced the risk in its CLOs by rotating out of credits rated B3/B-.

“In conjunction, we have been willing to give up some current spread while largely maintaining par and reducing warf,” says Ouderkirk, adding that his strategy involves minimising exposure to short-dated credits, higher levered credits and those with substantial earnings adjustments.

Pretium is one of many CLO managers making ratings-based adjustments to their portfolios.

The dispersion in loan pricing sparked conversation at the summit. “I think the reason we’re seeing this bifurcation so dramatically is that we’re all very sensitive to what happened during the crisis,” said AGL Credit Investors’ chief operating officer Wynne Comer. “Portfolio managers are trying to get way ahead of it by either building par where they can or avoiding triple Cs, which means avoiding B3s.”
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“We expect loans and structured corporate credit to lead the market volatility ”
Jerry Ouderkirk,
Head of structured credit | Pretium Partners
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