Global credit funds & CLO's
May 2020
| Issue 223
Published in London & New York.
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Opinion credit derivatives
Where are the gloating I-told-you-so columnists who claimed CLOs would bring global destruction?
May 2020 | Issue 223
It’s difficult to ascertain how fervid the dream world of structured credit investors can get, so I’ll refrain from generalisations. For all I know, some of you may jolt awake at the intrusion of a couple of basis points. But from what I hear — and from what I’ve experienced first hand — the state of lockdown is really ramping up the subconscious during our sleeping hours.
These untethered months make it easy to worry too much about the undecided heading of our market. Isolation has created a dreamlike state, in which the immediacy of office interactions and face-to-face meetings has given way to disembodied email communiqués, phone calls and Zoom chats. Days blur into one. Everything happens at a remove. On the internet, no-one knows you’re in your pants. Unless that’s your thing. Welshcake has been haunting the Beddgelert bunker wearing a Dead Zone-esque dressing gown, scrutinising data and pondering how life has taken on the aspect of Dylan Thomas’s esteemed play for voices, Under Milk Wood. Even there though, the dream world of Llareggub’s inhabitants was linked to a wealth of real dalliances. To what can we cleave in lockdown?
Crows and magpies are my companions
Forgotten for a month by the news-hungry Creditflux team, my social network has mainly been an assortment of squirrels, crows, magpies and seagulls that have decided to move in on my patch. Maybe it’s my inert repose at the front gate, a look in my eyes they’ve taken for weakness, my animalistic smell or just the crumbs I drop from constant snacking. From this basis of certain sanity I bequeath you reassurances the structured credit market will be alright. Granted this may sound too bold. And if I’m honest, even I had moments where I fancied the ground could open to swallow CLOs, CSOs and all that people have worked hard to establish since the last financial crisis. But let’s keep things in perspective. “We are not wholly bad or good, who live our lives under Milk Wood,” entreats the reverend Eli Jenkins. Yes loans and bonds have taken a beating, yes CLOs have been on the hook for downgrades, breached overcollateralisation tests, bulging triple C buckets, warehouse draw stop triggers, equity hits and pulled repo lines. Yet turn this around and most of these are factors of a functioning market. The provisions put in place are doing what they are supposed to do. In the meantime, as far as we know, no managers are closing up shop, there is no wide-scale unravelling of deals, investors aren’t fleeing the asset class vowing never to return. And where are the headlines screaming Armageddon? Where are the gloating I-told-you-so columnists who claimed CLOs would bring global destruction, causing the downfall of humanity and all life on earth?
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CLOs are a cushion for loan markets
The truth is, CLOs are providing a cushion for leveraged loan and bond secondary markets in the downturn. This lives up to how they were billed and perfectly reflects the buying boost they gave to primary markets when times were good. Leveraged loan prices were far more bifurcated in the 2008/9 global financial crisis — and that wasn’t even a corporate credit-led crash. Of course, central bank and government interventions help — although their long-run sustainability will be tested. But the clincher is the fact that the CLO primary market is still open, even in Europe — which is hardly suggestive of a meltdown. Clearly some investors see an opportunity, although it is ironic that static deals — the format hardest hit by the downturn — lead the way forward, as cheap liabilities and short tenors make for great business. In a Welsh myth associated with my abode, Gelert came to a sad end after Prince Llewellyn mistakenly believed the faithful hound had killed his son. Only after striking the fateful blow did Llewellyn realise Gelert had saved the babe from a wolf. In a similar way, we in structured credit know the truth about CLOs for sure now, so let no-one ever again get away with pointing a sword at them. There are better uses for such weapons. Lockdown at Beddgelert became a corvid crisis when I woke to find an open front door, an overturned tray of welshcakes and the whole noisy menagerie tucking in. Quoth the raven: “Make us more.”
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We have seen a measured response to the coronavirus crisis: fund managers aren’t collapsing and investors are not shunning CLOs
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