Nuveen launched in December a collateralized loan obligation (CLO) ETF focused on single A-rated CLO bonds (NCLO), and in January it converted the Nuveen CLO Opportunities Fund to an interval fund (NCLOX), providing a broader range of investors with access to CLO equity and mezzanine tranches. By focusing on less fashionable parts of the CLO stack—most CLO ETFs that target AAA and BBB bonds—Nuveen aims to generate higher returns without significantly increasing risk.
And there is likely to be plenty of demand. Himani Trivedi, head of Nuveen's structured credit team, which manages $18.4 billion in CLOs and CLO investments within the asset manager's $44 billion leveraged finance portfolio, noted the CLO market's $150 billion size in 2004 when she joined Symphony Asset Management, then a division of Nuveen.
We'll likely see hockey-stick growth on a product like this, especially in the corporate credit investment space.
Soon after, she started up Symphony's CLO platform. Since then, the CLO market has grown to $1 trillion and provided excess returns and minimal impairment through good times and bad. It's a performance the broader investment community is just starting to recognize.
"There's a network effect that has yet to come, and we'll likely see hockey-stick growth on a product like this, especially in the corporate credit investment space," said Trivedi. She added that CLO ETFs should benefit especially, because they currently represent only $30 billion of the $10 trillion ETF market, and they offer a new and attractive asset class to retail investors and the wealth advisory channel.
Trivedi recently spoke to Asset Securitization Report (ASR) about the challenges she sees ahead for the CLO market and Nuveen's strategy behind its newly launched funds.
The new administration is more pro-business, and that suggests there's going to be more M&A activity, more opportunities to invest.
ASR: What other factors do you see driving the CLO market in 2025?
Trivedi: One of the most interesting attributes of CLOs is they offer a menu of risk and return, from AAA to equity, that investors can allocate to based on their risk appetites. Then from a credit perspective, the last couple of years have been influenced by high base rates, given the focus on inflation. At the same time, credit spreads have ground tighter because of the limited supply in the loan market. Having said that, the new administration is more pro-business, and that suggests there's going to be more M&A activity, more opportunities to invest. Nevertheless, we are set up for more volatility this year.
ASR: To what extent have you prepared for market turbulence?
Trivedi: It won't be broad-based, at least with respect to the impact of tariffs and immigration, in my opinion, because the administration wants to avoid a recession. It's more of a negotiating technique. But there will be net winners and losers, which creates opportunities. As far as financing costs or credit spreads, we don't expect significant widening. If anything, we may see further tightening.
ASR: Does that tightening potential apply to both broadly syndicated loan (BSL) and middle market CLO spreads? Haven't they both tightened significantly already?
Trivedi: BSL CLOs still offer some excess spread versus other securitized assets, so there's a more favorable level of risk-adjusted toward CLOs as people deploy investments across different asset classes. But we don't expect massive tightening on the liability side.
On the asset side, most of the loan refinancing has worked its way through, and if we see more new issuance from M&A, or middle-market loans graduating to the BSL market—all that activity will help reduce the pace of spread tightening at the margin. So there will be some tightening, but not as accelerated as we've seen.
The risk premium between BSL and middle-market CLOs has tightened a lot, and when there's volatility that gap can widen out dramatically.
ASR: Will the same apply to middle-market CLOs?
Trivedi: The tightening will continue, but the risk premium between BSL and middle-market CLOs has tightened a lot, and when there's volatility that gap can widen out dramatically. So you have to be aware of what you're buying.
ASR: What do tight spreads mean for investors?
Trivedi: CLOs tend to give additional value versus other asset classes, but we'll see volatility in CLO prices over time. So in my opinion there's more market or price risk versus impairment risk, given how CLOs are structured.
ASR: Does that also apply to CLO equity, since it experiences the first losses?
Trivedi: Equity is the most interesting part of the entire CLO capital structure. Since both asset and liability spreads have tightened, the cash flow to equity remains largely intact. It won't be at [a] 20-plus percent distribution of cash flow, but there's an opportunity for double-digits. And CLO deal structures offer long-term, contractual financing rates, so if a deal is issued today, financing costs are super tight, and investors are locking that in for a long period. If the market tightens further, there's the ability to reset or refinance it to a tighter spread level.
And on the asset side, because loans are floating rate there's no mark-to-market risk from rate moves. Instead, given long asset volatility, managers can opportunistically trade in and out of loans, and CLO equity benefits from that. If the CLO manager selects assets well and can navigate through different cycles, the CLO equity's returns will be interesting from a long-term perspective.
ASR: What if defaults increase?
Trivedi: The reality is CLO equity is structured such that it gets cash flows on a quarterly basis, so you're getting this routine distribution that mitigates CLO equity's downside risk significantly from a total return perspective—it's not like private equity where you're waiting until the end to see if the portfolio companies make it or not. So a small portion of the asset portfolio will have defaults and loss events, but CLO equity is continuously getting distributions, and from a long-term perspective it has outperformed other asset classes.
For Nuveen's interval fund, a combination of mezzanine double- and triple-Bs—and equity is a good place to be for longer-term, risk-adjusted returns.
ASR: Why does the Nuveen CLO ETF focus on single-A bonds?
Trivedi: We like the middle part of the capital structure relative to the higher part because there is additional yield but enough subordination to avoid getting impaired.
On the other hand, for Nuveen's interval fund, a combination of mezzanine double- and triple-Bs—and equity is a good place to be for longer-term, risk-adjusted returns. That is because the SOFR rate is not going to reduce dramatically in the near future. So the rated bonds generate cash flow of 9% to 10% annually, and CLO equity still provides optionality.
ASR: Last year saw a record number of liability management exercises (LMEs), but overall they were less aggressive than the previous two years in terms of the disparity between lender groups. How do you see LMEs impacting the CLO market going ahead?
Trivedi: Not all LMEs are created equally, and many of these LMEs [and related debt exchanges outside of bankruptcy court] were done to deal with short-term liquidity needs or extend existing maturities. There have been a good number of debt exchanges where the loan was trading at 60 a year and a half ago, and now it's trading at par. But you're right, over the last year or so there have been fewer "distressed" exchanges through LME exercises, in part because [profit] margins started expanding last year as inflation fell, and then there were a lot of discussions about aggressive LMEs potentially resulting in litigation. So we're not necessarily seeing the huge discrepancy between lending groups.
However, there's definitely a more favorable outcome for the group of lenders steering the LME, and their recoveries will look different. So it's still important to be in the driver's seat, and that's typically been the larger lenders. For example, we have a distressed team, and not every manager out there has that capacity.
