Seeking to replicate the historically strong performance of the bank loan market, Mountain Point Credit Management priced in early March its inaugural collateralized loan obligation (CLO), Mountain Point CLO-1. The $507 million, Rule 144 transaction employs Mountain Point's systematic investment strategy across a loan portfolio comprising an atypically broad range of loan issuers.
"Rather than requiring fundamental analysts to look at the information and then score all the names they cover, we use our algorithm to do that," said Kelly Byrne, the CEO of Mountain Point.
Byne was a biomedical engineer by training who led an engineering team at a startup medical-device manufacturer before obtaining an MBA. He then worked at Voya Investment Management for 18 years where he was a senior portfolio manager and headed its capital markets when he left in 2023, starting up Mountain Point a year later.
Mountain Point launched its loan investment platform last November, after raising $350 million in equity and $1 billion in bank financing. The platform covers more than 1,000 broadly syndicated loan (BSL) facilities from 900 issuers. Byrne recently discussed with Asset Securitization Report (ASR) his firm's innovative approach to CLO management and his insights on the loan market.
ASR: What is Mountain Point's investment strategy?
Byrne: The loan market's total return in 31 of the last 34 years has been positive, and in the three negative instances the following years were marked by significant outperformance that more than made up for the previous year. We want to provide investors with that type of return profile through our systemic approach.
ASR: How does the process work?
Byrne: We ingest data from more than 30 sources and use data engineers to automate the process and try to capture all that information in a more structured way. Using that data, the algorithm attaches a risk ranking to every name in the portfolio, acting like a credit score, and every day it reevaluates those risk rankings. Then it pairs those rankings with pre-established portfolio guardrails with the aim of tilting the portfolio in terms of basis points toward the names with low-risk rankings and away from those with high rankings.
ASR: When do you adjust the algorithm?
Byrne: We don't make changes to the algorithm often, and any changes we do make have to go through a very rigorous control process.
ASR: Where does the data come from?
Byrne: We have about 30 sources of data, things like ratings and pricing, liquidity scores, and information from a variety of loan-specific sources. We then triangulate that data to make sure it's all clean, organized and accurate, and then use it in our decision-making process. But what makes us unique is really the way we look at all of these data sources and the way that we use the data and lean into portfolio optimization and portfolio trading and technology, to make our business far more systematic and remove as much of the bias out of the process as possible.
ASR: Most CLOs invest in 150 to 250 loans. How many does Mountain Point's CLO invest in?
Byrne: We own in excess of 900 issuers. We think of it as a more diversified portfolio that better reflects the general BSL loan market. We market the platform and the CLO in particular around that diversification. We think there's a lot of value in diversification, and that story has resonated with investors.
ASR: What types of investors are in your current CLO?
Byrne: Our investor base is very similar to other CLO managers. We have a wide range of diverse blue-chip institutional accounts.
ASR: Does Mountain Point intend to issue more CLOs this year?
Byrne: Mountain Point intends to be a serial CLO issuer, with CLOs issued on a quarterly cadence, subject to market conditions.
ASR: Does Mountain Point hold on to the CLO equity, or does a third party hold it?
Byrne: Mountain Point works with strategic partners on CLO equity. Eagle Point [Credit Management] supported the equity in our inaugural transaction and has agreed to support our early issuance as we build the platform.
ASR: What is your outlook for the loan market and its impact on CLO investors?
Byrne: The BSL loan market is tremendously resilient, with a great return profile, and the CLO is a great product when you look at its performance—AAAs have never experienced a loss. My sense is that will continue to be the case.
ASR: Controlling groups in liability management exercises (LMEs) tend to exclude smaller CLO managers from the most lucrative parts of the financing. Mountain Point is still a relatively small CLO manager, so how do you intend to maneuver when LMEs emerge?
Byrne: We're a very diverse platform in terms of the number of loans, and as a byproduct of that our exposures are smaller on average than most folks in the market. So we will never be on steering committees. But we have a trader on our team who is dedicated to the distressed portion of the market. He has longstanding relationships with the distressed community and he works to ensure we're involved in all the cooperative agreements and relevant conversations; not necessarily on the steering committee, per se, but with the rest of the investors in those calls and in those syndications. The more you can participate in those bank group conversations, the better your outcome.
ASR: There have been several LME-related legal decisions over the last two years that favor lenders outside steering committees. Has that impacted LMEs?
Byrne: We've seen different phases in what we now refer to as the LME lifecycle: Phase one was marked by LMEs that were not particularly aggressive, then they became more aggressive, and now less aggressive again. We're in a good spot now where we haven't seen as many really punitive outcomes that benefit only a few lenders at the expense of the many.
