The ranks of CLO investors may have thinned this year amid broader bond market turmoil, but it can still be difficult to put money to work with the best managers.
Blame a single, large Japanese investor that has been buying up the entire senior tranches of individual deals.
Jamil Nathoo, head of collateralized loan syndicate at Goldman Sachs, says this has created opportunities for managers that might be described as second tier. “We’ve seen real money accounts grow their manager list,” he said at IMN’s annual CLO conference Tuesday. For a time, these accounts tended to invest with the same 10 or 12 managers. But now, “they’re not getting access because one Japanese investor in particular is buying the entire AAA tranches” of deals from these managers, he said.
Lesser known managers are benefitting from the scarcity of triple-A rated CLO paper despite the fact that a number of other Japanese buyers, as well as European buyers, have stopped putting money to work in CLOs. Both kinds of investors are sitting on the sidelines because movements in exchange rates have made investing in U.S. dollar assets less attractive.
But new issuance of CLOs is also off sharply this year, leaving investors in triple-A rated CLO debt fighting for access to deals from the best-known managers.
Lesser known managers still have to think about new ways to attract new investors, however. Earlier this year, for example, Goldman Sachs underwrote a CLO with two tranches of triple-A notes: a senior class with additional credit enhancement and a junior class.
“This gave an investor more comfort with a new manager,” Nathoo said. This type of structure is typically seen in commercial mortgage securitizations, where it was designed to give certain investors comfort that the senior securities are essentially bullet proof. But it’s unusual in the CLO industry.
Risk premiums on CLOs have narrowed significantly over the past couple of months after widening sharply in January, February and March.
Participants at the conference expect to some additional narrowing. Spreads on triple-A rated tranches are currently quoted around 160 basis points over Libor.Just 11.5% of audience member polled at the triple-A investor panel expect spreads to end the year at this level; 38.5% see triple-A spreads moving in to 150-160 basis points, while 34% see them contracting even further, to 140-150 basis points. Another 11.5% see spreads ending the year at less than 140 basis points.