May 2021 | Issue 234
Analysis
CLOs
Woah, we’re halfway there
Charlie Dinning
Data journalist
Tanvi Gupta
Head of data journalism
Judging by the 2020 vintage, European CLO overlap is 50%. But varied approaches to holding bonds and the many loans managers turn down mean there are ways for issuers to outperform
The overlap between European CLOs reached 50.0% last year, which is perhaps understandable given how the coronavirus stymied loan issuance in 2020.
In a disjointed 12 months, 52 managers went effective with new CLOs while factors such as scattered primary issuance of corporate debt and a focus on industries that were ‘covid-safe’ reduced the range of loans their CLOs could hold. Despite this, the figure for 2020 didn’t stray far from the historical average published by Creditflux last year, when we found there was a 51.7% overlap for all reinvesting CLOs in Europe. In 2019, when we last looked at managers with deals going effective the year before, the overlap was 48.7%
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Manager exposures (%) to largest corporate debt issuers*
* Managers are top 10 based on the size of their portfolios from deals that went effective in 2020. Debt issuers are largest in our data (see methodology)
** Acuris, the publisher of Creditflux, is a subsidiary of Ion Group
Debutant has highest overlap
2018 debutant Voya Alternative Asset Management has the highest portfolio overlap with the rest of the European CLO market at 60.43%. KKR, Assured (Fuji) and Blackstone follow close behind with averages of 59.3%, 58.7% and 58.5%, respectively.
Voya has four European CLOs under management, two of which went effective in 2020. It has a portfolio overlap of more than 70% with four managers: Apollo, Blackstone, Investcorp and Sound Point.
But the managers with the greatest similarity are Blackstone and KKR. The overlap between them is 78.4%. Blackstone has four deals in the data, while KKR has two.
A European CLO portfolio manager at a firm which typically prints one CLO a year says that when managers issue three or four deals a year there is a good chance the overlap will be over 70% between them.
“The European loan market is just not that deep,” says the London-based official. “It allows you limited diversification between credits if you print high volumes.”
78.4%
Overlap of Blackstone and KKR’s 2020 effective CLOs
Nevertheless, managers can differentiate themselves. Out of the 10 largest European CLO managers, Carlyle Group has the lowest overlap on average with the rest of the market at 47.3%. And recent debutants Napier Park Global Capital and Capital Four hold the least overlap with the market at 36.31% and 40.02% respectively. Both managers had one deal go effective in 2020.
In comparison with US CLO portfolios, where the average overlap is 39.3% for 2020 effective deals, European CLO overlap can seem high. But a European CLO investor says that in 2020 many CLOs bought bonds to diversify. “Diversity scores have not necessarily been managed loan-to-loan, but through bonds and trading as a way of building par,” he says.
A European CLO manager agrees. “Last summer we switched out of loans into bonds and were able to build a lot of par when bond prices rallied quicker on the back of the vaccine announcements,” says the portfolio manager.
PGIM continues to top the charts for highest bond exposure among European CLO managers. As per February reports, PGIM has 21.56% of its portfolio allocated to bonds across three CLOs in our dataset.
Overlap is likely to decrease
Market sources say that, last year, European CLO managers had to focus on short-dated, clean portfolios and a limited primary loan market. Their portfolios will look different in a year’s time due to the sheer volume of loans coming into the primary market in 2021 and the fact most 2020 CLOs will likely be reset to a traditional four-to-five year reinvestment period.
“We’ve got eight or nine loan deals on the desk each week,” says one European CLO investor. Another points out that his decline rate is north of 50% and that still means looking at around 20 corporate debt transactions at any given time.
A high overlap would theoretically tend to encourage similar performance across CLO managers. But according to one European CLO manager there is a lot of dispersion in CLO equity returns because, though portfolios may look the same at a point in time, managers take different trading approaches.
Nevertheless, one loan investor feels manager style is becoming predictable. “Whenever we come across a loan deal that is a bit hairy, you can almost predict which managers will look into taking that risk,” he says.
Methodology
- Data includes European CLOs that went effective in 2020. Bond-flex deals, triple C-flex deals and reissues are excluded.
- For each pair of managers, the portfolio overlap figure is calculated from a comparison of the weighted average of common issuers across CLOs in the data. Overlap is based on issuer name.
- Figures are based on (or closest to) February 2021 trustee reports.
- All data has been sourced from CLO-i and Moody’s Analytics.
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Global credit funds & CLO's
May 2021 | Issue 234
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