February 2021 | Issue 231
Opinion CLOs
We need to remove CLO misinformation from the market
Kashyap Arora
Co-chief investment officer
Vibrant Capital
Born:
Amritsar, northern India
Lives:
Upper west side of Manhattan, New York
Education:
Bachelor’s degree in electrical engineering (Indian Institute of Technology in Madras) and master’s in mathematics in finance (New York University)
Hidden talent:
Lead actor in the film Silicon Jungle, produced by the Indian Institute of Technology
Last holiday destination:
Amritsar in early 2020 for a wedding
Favourite movie:
The Usual Suspects for its writing, acting and memorable plot twist
Bucket list:
To participate in a triathlon
Career:
Arora started his career at Vibrant in 2008, shortly after obtaining his master’s degree. He progressed to managing director and head of the structured credit group in 2016, and in October 2020 was promoted to co-CIO alongside Vibrant founder Volkan Kurtas.
Vibrant:
Founded in 2006, Vibrant has $7.3 billion in assets across structured and corporate credit and is both an investor and manager of CLOs. It is majority-owned by its employees and rebranded from DFG Investment Advisers in January.
Q.
What are the best and worst investments in credit today?
A. We believe the best investments are where you are inherently buying optionality. In CLOs, we prefer to do this through CLO equity where we have the ability to increase cashflows through a reset or a refinancing. The difference in a reset for CLOs today, compared to a few years ago, is that there is less of a defined framework; each CLO is different. Our CLO equity portfolio has deals in each vintage from 2012 to 2020 and across those nine vintages there are a variety of structures and managers. We’ve seen these differences highlighted in the primary market where there is a unique approach for each CLO.
On the other side, high yield valuations appear stretched. If you look at CDX NA High Yield, it is trading sub-300 basis points, which suggests low defaults. The index has rarely traded inside 300bp and we think there is potential for those spreads to widen.
Q.
What is the best investment you’ve made?
A.
The best time to invest in CLOs was during the financial crisis in 2008/09 and 2020, and we have been participants during both periods. In 2009 we were part of a large CLO equity portfolio transaction, which resulted in a significant return multiple.
Similarly, last year we were among the most prolific investors in the secondary CLO market during Q2 and Q3. At that time, many investors who had bought CLOs were not ready to undergo a shock cycle. We were able to source assets because some CLO funds faced redemption pressures, while other funds which had not fully committed to the CLO market shed positions.
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Q.
And the worst?
A.
We went short credit in 2016 through the CDX NA HY index to hedge some of our CLO positions as spreads widened following the UK’s Brexit vote. It underlined how challenging it is to hedge CLOs given these structures have about 200 credits and the portfolios rotate every month, and the 2016/17 market had its very own technical nature. You can’t hedge intra-week moves within CLOs, but you can hedge black swan events and apply tail hedges. A similar hedge in February 2020 would have made money.
Q.
Explain your firm’s name
A.
We’ve just rebranded to Vibrant Capital, which reflects the new generation of leaders at the firm and our diverse backgrounds. Before this we were DFG Investment Advisers. The DFG stood for Dundee Financial Group because we were originally affiliated with Canadian firm Dundee Corporation until spinning out in 2008.
Q.
Where is the market heading?
A.
2020 was broad brush strokes and I expect 2021 to be more credit specific. Although currently there is strong loan demand, there could well be better entry points over the course of the year.
Q.
What needs to change about the way your industry does business?
A.
We need to remove CLO misinformation from the marketplace. CLOs produce monthly reports which outline each trade and the entire portfolio composition, so they’re about as transparent as you can get and they performed well in 2020. And yet there were lots of negative headlines early last year, which were unfounded and did not present a rational case. If we compare to private credit, that market has grown quickly and it is newer and has not survived downturns in the same way as the CLO market.
Q.
Where do you see future opportunities for your business in credit?
A.
I think we will start to see greater ESG incorporation in CLOs. While CLOs are ESG compliant by virtue of not investing in some of the negative ESG sectors, there is a lack of standardisation and no framework to rely on presently, so there is work to be done. But there is a clear migration towards ESG across credit.
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Global credit funds & CLO's
February 2021
| Issue 231
Published in London & New York.
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