Credit Rendezvous: Investors try to avoid suplex city as recession and inflation reform tag-team

Report 20 July

Credit Rendezvous: Investors try to avoid suplex city as recession and inflation reform tag-team

This quarterly Creditflux report covers the most liquid assets such as CDS, through to buy and hold investments such as distressed debt, and everything in between

Inflation and recession are back on the agenda. But this isn’t the 1970s and the old tag team have picked up some new moves.

For a start, the US CLO term curve has been beaten into submission: five-year CLO triple As were pricing in the 180s in late June, while three-year CLO seniors were about 30 basis points wider. Its an unusual inversion that likely owes something to early 2020, when CLO issuers printed short-dated deals after the covid crash and monetised gains within a year.

“A short non-call period will support a potential call or reset to monetise any normalisation,” says Fair Oaks Capital founder Miguel Ramos, highlighting the importance of optionality for CLO equity investors.

Given this trend, US CLO managers are not regularly participating in the primary loan market, where deals lend themselves to longer-dated structures. But BC Partners’ Matthias Ederer says this opening has allowed distressed debt investors to step into the ring and impose some of their conditions into loan documentation.

“The pendulum has now swung to being much more lender friendly,” he says.

CSOs are also an alternative for investors looking to tap out of CLOs. “We are evaluating to deploy into the equity tranche of a two-year bespoke with 100 names,” says Ymer’s Hubert Warzynski.

Another option is direct lending. Getting into long lock-up private loans might seem to some investors akin to submitting to a sleeper hold, but market participants claim otherwise.

For example, Colbeck’s Jason Colodne says there are three reasons he expects the number of bankruptcies and debt refinancings to remain low. “These are: the lack of covenants... private equity’s significant influence... and the amount of capital raised.”

To truly evade a recession/inflation induced chokeslam, investors might also try investment grade. Allspring portfolio manager Noah Wise says there is no need to delve down the capital structure to lock in strong returns.

“You can invest in a diversified portfolio with a high single-A to low double-A average rating and get attractive yields,” says Wise. He believes that, given the increase in benchmark rates and widening in credit spreads, such a portfolio could generate a roughly 5% yield.

This instalment of the Credit Rendezvous features Miguel Ramos (Fair Oaks); Denis Struc (Janus Henderson); Jason Colodne (Colbeck); Mark Slusar (Enhanced); Floris Hovingh (Perella Weinberg); Hubert Warzynski (Ymer); Paul Norris (Conning); Matthias Ederer (BC); John Kline (New Mountain); Autumn Graham (Schroders); Viktor Hjort (BNP Paribas); Noah Wise (Allspring); Serenity Morley (Mount Street); and Jason Horowitz (CIFC).

By Dan Alderson, Sayed Kadiri, Michelle D'souza, and Hugh Minch

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