CLO Investor Views in a Post-COVID World: Opal Group European CLO Summit Recap

Andrew McClymontIt’s great to be back to in-person conferences, and earlier this month Trepp had the opportunity to sponsor, attend, and speak at Opal Group's European CLO Summit. Over the course of the event in London, the team attended several panels to discuss the current state of the market, ESG trends, investor behavior, and the future outlook for the CLO market. Below we have outlined some of our key takeaways, most notably projections for the future of both the US and European markets.

Investors and the CLO market

As reported by Trepp and players in the corporate CLO market, 2021 has been a great year for CLO issuance, with outstanding amounts surpassing $1 trillion globally. Panelists at the European CLO Summit suggested that we are currently around the mid-cycle of the market. They were under the impression that CLO momentum should carry into 2022, though with the LIBOR transition to SOFR there may be an issuance drop-off.

Investors seem to have been spoiled for choice with the current state of the issuance market. Large institutional investors who focus on the top of the stack discussed the idea that new deals are more appealing in many cases as they can get sizeable portions of the AAA. Because of this, some are wary of refinancing or resetting CLOs due to the lack of guarantee around the portion of the AAA that they may get.

Rise of CLO Managers

When investing in CLOs, manager selection is naturally a key decision, and with more managers coming to the market the question, what are investors looking for or at? presents itself. A good track record is always favorable but some appear more than willing to go for smaller managers. In fact, a key area to look into seems to be the attrition of employees,  notably how dependent a company is on certain employees, to ensure limited dependence on a single player.

“A good portfolio before COVID will be a good one when it leaves but a bad one won’t be.” This was an expression that hovered around the conference and lead to further discussions on managers' strategies. Because CLOs are long-term vehicles, managers need to be looking beyond COVID and look towards the future of the market. In essence, panelists expressed that portfolios shouldn’t be built solely on risk-aversion that may be caused by the market anomaly of COVID, though that’s not to say the short-term strategy isn’t important.

Relative Value

Panelists gave an overview of the credit stack and agreed that in the CLO universe the US tranches at top of the stack were, in most cases, more attractive than the EU ones. Whereas at the equity level, the EU market is more attractive than the US.

These views show a change in investors’ views as previously, the European market was seen as more attractive at the top of the stack. A factor in this shift of relative value will be the EURIBOR curve becoming less negative and, as such, the value of the floor decreasing, from an investor’s viewpoint, with one market projection currently having the EURIBOR becoming 0% around November 2023.

Trepp has noted this observation in the market over the past few weeks. Blackrock has brought to market their second new issue in 2021, with one of the single-A tranches forgoing the EURIBOR floor during the non-call period for an additional spread of 55 basis points relative to the pari passu floored tranche also present in the deal. At the time of pricing, the three-month EURIBOR was at -0.565%, and with the current forecasts predicting a less negative EURIBOR this should be an interesting tranche to watch.

To learn more about Trepp’s findings from the conference or to see TreppCLO solutions in action, request to speak to an expert here.
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CLO Investor Views in a Post-COVID World: Opal Group European CLO Summit Recap