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Global credit funds & CLO's
June 2022 | Issue 246
Published in London & New York.
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June 2022 | Issue 246
Event CLO symposium
We’ll get through
this awkward patch
Wide liabilities have made pricing CLOs trickier in the past few months. But speakers at Creditflux’s CLO Symposium were optimistic that the arbitrage is OK — so long as you can place those triple As
“It has been more challenging pricing CLOs… we’ve been syndicating triple As”
Steve Vaccaro
Chief executive officer, CIFC Asset Management
CIFC has priced four US CLOs this year. The first of these was a lay-up amid strong CLO demand in January. The market changed a few weeks later and since then CIFC has been syndicating triple A CLO debt, which takes longer, because US banks have been writing loans rather than buying CLOs.
“Large triple C buckets does not mean filling them on day one”
David Altenhofen
Senior portfolio manager, PensionDanmark
Altenhofen prefers conservative portfolios with low triple C and low single B exposures. He says these CLOs will be best placed to capitalise when stress picks up.
“CLO liability spreads are driving the timing of deals”
Brad Larson
Head of CLO new issues, Credit Suisse
It used to be that CLO ramp and asset pricing dictated a CLO take out, but today the sticking point is figuring out where CLO triple As will price. By contrast, sourcing attractively priced loans is not such a problem.
“You have to be careful with ESG exclusion lists”
Steve Baker
Primary European CLOs, JP Morgan
Excluding companies that undertake oil and gas exploration makes sense. But circumstances change. The Russia/Ukraine war could mean a shortage, driving countries to coal. Baker says some flexibility and ESG engagement might be a better approach rather than outright exclusion.
“The question is, can you execute on your portfolio?”
Deborah Cohen Malka
Portfolio manager, AlbaCore
The CLO opportunity set can fluctuate and at the time of our event the theoretical arbitrage looked better than two weeks prior. But Cohen Malka says an orderly primary loan and bond market is most conducive to CLO issuance and some bonds have been pulled.
“There are a broad range of ESG provisions”
Sushila Nayak
Partner, Orrick
Some CLOs prioritise negative screening while others go further with positive screening. There is more emphasis on due diligence, but while some CLO managers look at this initially, others do so on an ongoing basis. Most recently, some CLOs have added ESG portfolio tests.
“This could be a primary wave to lean into”
Conor Power
Portfolio manager, WhiteStar
Power says in the two years running up to the coronavirus outbreak, his firm’s loan approval rate was about 30%. Afterwards, it shot up to 60% because post-covid structures were more resilient. A similar dynamic could play out in the primary market in the coming months.
“It is way easier to trade bonds and build par”
Hugh Upcott Gill
Co-head of European primary CLOs, Jefferies
Trading as a means of building par is going to be a priority for managers, and having the flexibility to buy and sell bonds could be key, especially if the forward curve keeps rising.
“You have to consider the primary arb, secondary arb, and OID-based arb”
Som Mukherjee
Head of investments, Lakemore
Buying high-quality CLO collateral at a discount can add 2% to a CLO equity IRR. Mukherjee says across those three factors, the CLO arbitrage is attractive.
“There could be limits on side-letters”
Jon Burke
Partner, Dechert
The SEC’s private fund regulations put emphasis on treating investors equally, which means CLO fee-sharing agreements might have to come to light.
“We have been doing EU-compliant US CLOs”
Himani Trivedi
Head of structured credit, Nuveen
Trivedi explains why Nuveen is moving into the European CLO market, citing the growth of the investor base, growth in the number of issuers and the ability for Nuveen to offer other fixed income solutions to European investors.
“20% of the triple A buyer base is active”
Alexander Wall
US syndication CLOs, BNP Paribas
Only a fifth of the CLO triple A investors BNP Paribas has worked with are investing.
“It is necessary to get everybody around the table”
Sabrina Fox
Chief executive officer, Elfa
Elfa has made a coordinated effort to standardise ESG questionnaires and improve efficiency for borrowers.
“We could start seeing Article 8/9 language in US CLOs in six months”
Kentay Miller
Head of structuring, MJX Asset Management
Many US CLO managers are looking to satisfy the requests of European investors.
“Some investors would rather have a simple discussion on ESG”
Vlad-Radu Mitroi
Head of ESG, Chenavari Investment Management
A standardised approach to ESG is great, but box ticking can lead to complacency.
CLO attraction is down to the ramp
We attempted to sell a fictitious five-year US CLO to four expert investors in order to get an insight into their processes. It turns out the amount of ramped assets and their weighted average price are crucial.
With loan prices dropping into the mid 90s and the fact it now takes a month to place CLO liabilities, CLO pricing is on a knife edge.
Bates: ‘If this is 50% ramped returns might be 12-14%’
Livermore Investment Group’s Gaurav Suri said our CLO capital stack looked good, but it depended on how heavily ramped the portfolio was. He preferred scrapping the single B tranche as these can be difficult to reset.
Desai: ‘You can find a few hidden gems’
Shiloh Bates, managing director at FlatRock Global, thought there were better deals in the secondary market: “Assuming this is 50% ramped, returns might be 12-14%, whereas in secondary you can get 17-18%.”
Sound Point Capital Management’s Ujjaval Desai said he would be open to the deal as he likes mid-sized managers where “you can find a few hidden gems”.
Chakraborty: ‘Double B MVOC is a bit stretched’
Pearl Diver’s Chandrajit Chakraborty expressed interest in the double Bs if they could be bought in the low 90s. However, he warned of volatility.
“Double B MVOC [market value overcollaterisation] is a bit stretched and if loans drop a couple of points you could see MVOCs fall below 100,” he said.
“CLOs have had the highest bid-depth. You might not like it, but it is there”
Scott Duggal
Head of EU consumer ABS and CLO research, Abrdn
European CLO liquidity is far superior to ABS, RMBS and other parts of the structured credit market. A recent CLO bid list run by Abrdn showed bid depth that was twice as high as other asset classes.
“Close to 100% of managers have negative screening”
Conor O’Toole
Global head of CLO research, Deutsche Bank
Almost all European CLOs now have some sort of ESG angle to them. But only 50 are marketed as ESG-compliant.
“Origination is something everyone focuses on, but ESG is a fluid thing”
Richard Peterson
Product head of credit data and analytics, Virtus
The ESG status of a borrower will change over time so it must be monitored.
“Negative screening is a blunt tool”
Alice Lee
Director of investments, WTW
But there are issues with positive screening, too. For example, it means potentially cutting out a lot of loan issuers that are on an upward trajectory.
“SEC regulations will affect the vast majority of European CLOs”
Rich Reilly
Partner, DLA Piper
Even though the SEC’s private fund reporting rules are centred on the US market, up to 90% of European CLOs will be captured.
“This could result in a change in market practices”
John Goldfinch
Partner, Milbank
Under the SEC’s proposed private fund regulations, fee rebates will have to be disclosed.
“$4.5 billion is the new private credit transaction”
Kelli Marti
Portfolio manager, Churchill Asset Management
The assumption that private credit equals mid market is no longer accurate. A deal in May shows that private credit deals can involve massive borrowers.
“It is ironic there is often limited diversity in CLO marketing books”
Michelle Manuel
Portfolio manager, Investec Bank
Most of the ESG focus has been on society, yet glancing through CLO pitch books highlights that team make-up is not as diverse as it should be.
“Mid-market CLO managers are behind on ESG”
Mark Hale
Chief executive officer, Prytania Asset Management
An end of year survey conducted by Prytania showed that mid-market CLO managers are behind broadly syndicated loan CLO managers in implementing ESG frameworks. This might be because they rely less on European investors.
“The traditional mid-market space is less crowded”
Andy Frank
Partner, Fortress Investment Group
As a number of lenders eye large deals, they are leaving some “interesting” mid-market deals behind.
“We like having more control over individual loans”
Shawn Cooper
Portfolio manager, Orchard Global Asset Management
Mid market CLO investing means understanding loans on a line-by-line basis.
“There is scope for below IG CRE CLO tranches to be sold”
Nick Shiren
Partner, Cadwalader
The Starz CRE CLO transaction, a first of its kind deal in Europe, resulted in the junior debt tranches being retained. But these could theoretically trade as there is no legal requirement for the manager to hold these notes, unlike in the US.
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