The sharp selloff in leveraged loans has created opportunity for some CLO managers, particularly those with deep pockets. Managers that can quickly acquire loans at a discount in the secondary market can still make money bundling them into collateral for bonds.
Until recently, managers of collateralized loan obligations were more likely to rely a “warehouse”
line of credit to slowly acquire loans either at issuance or in second-hand trades. Now that so many loans are trading so far below book value, however, it’s become more attractive to “print and sprint,” or issue CLO notes before acquiring any collateral and use the proceeds to purchase loans quickly and cheaply.
“Warehouse is not as important anymore,” Sean Solis, a partner at law firm Dechert said at a panel at an industry conference Monday. “You’re going to see more print and sprint transactions...You can print and sprint at attractive prices right now and get a deal done the way you couldn’t last year.”
Solis was not alone. Other panelists at the ABS Vegas conference, sponsored by IMN and the Structured Finance Industry Group, including Amit Roy of Goldman Sachs and Paul Travers of Onex Credit Partners, agreed.
Of course, managers who bring new deals to market now are taking a big risk. Steven Oh, a managing director at CLO manager PineBridge Investments and another panelist, is a skeptic. “There are not a whole lot of people who want to step into the environment” he said, noting that investor appetite for CLOs themselves is uncertain. Just two CLOs totalling $826 million priced in January, through the pace of issuance picked up slightly in February.
Oh also pointed to the risk that prices of loans could fall even further as other investors such as mutual funds and hedge funds continue to pull money from the market.
“It’s a classic situation where asset classes are cheap but there doesn’t seem to be any catalyst to cause the crisis to reverse anytime soon,” he said. “So nobody wants to step in to catch a falling knife.”
The share of leveraged loans changing hand below 95 cents on the dollar grew to 30% in January, according to Thomson Reuters LPC. Only 3% of outstanding loans are being quoted at face value or higher.