Pretium Partners anticipates a busy year ahead in the collateralized loan obligation (CLO) market. The alternative-investment manager, founded in 2012 by CEO Don Mullen, a former Goldman Sachs partner, is more widely known for its activities in the residential mortgage market, where it manages $54 billion in assets. In 2017, it acquired Valcour Capital Management, with assets under management (AUM) of $1 billion, to step into the CLO business. It now manages $3 billion in CLOs while putting significant resources into developing its LATTICE proprietary technology platform that enables its analysts to slice and dice data on all CLOs from the 2.0 generation onward.
Roberta Goss, also a Goldman alum, joined Pretium as a senior managing director in 2019 to head up the CLO efforts, after leading DFG Investment Advisers' $4 billion CLO platform. She recently spoke to Asset Securitization Report (ASR) about what's ahead for the CLO market and the challenges it faces, including higher-for-longer interest rates and the proliferation of liability management exercises (LMEs) that can set lenders against one another.
ASR: How do you anticipate the CLO market unfolding in 2025?
Goss: Similar to 2024—a year of big issuance. Issuing long-term liabilities now is attractive because spreads are tight and the default outlook is more benign than it's been in a couple of years. Last year spreads tightened dramatically across the stack but particularly for AAAs, and they're the driver of new deal creation.
ASR: What activity are you seeing so far this year?
Goss: There's been a lot of price discovery. We haven't seen many new issues price, but we believe there will be a lock-step down in terms of AAA spread levels. Whereas in December AAAs were averaging 125 basis points over SOFR, it now feels like the market is coalescing around the 115 level. That's going to continue to drive more deal activity this year.
We're likely to do four resets this year and we're targeting several new issues.
ASR: What does that mean for Pretium?
Goss: We currently manage six CLOs, and we're looking to jump in with everybody else at the start of the year. We're likely to do four resets this year and we're targeting several new issues. One benefit of the Pretium platform is we control the equity in our transactions, and that allows us to take advantage of CLO issuance opportunities.
ASR: How so?
Goss: When we enter the market, our equity is already spoken for, as opposed to
sourcing it at the time we're pricing the deal, as many managers do. One key attractive feature of the CLO and structured credit market is the ability to lock in very long-term, floating-rate liabilities at opportunistic times, and with equity capital behind you it's easier to pick that time.
ASR: What's pushing down spreads?
Goss: Higher for longer rates keeps demand for CLO liabilities high, so with Secured Overnight Financing Rate (SOFR) still around 430 basis points for one- and three-month SOFR, it's a very attractive all-in yield for investors. Demand from CLO ETFs is also impacting liabilities—some saw enormous AAA inflows in 2024, and that doesn't seem to be abating. And the third factor is continuing refi and reset activity. Because a lot of liability investors have seen a return of capital, they have to go out and reinvest. We should have more clarity [soon], as more new-issue deals come to market.
We're also seeing more repricing activity on the loan side that's driving spreads down. So it's sort of a cross-market, virtuous circle.
ASR: Are CLO managers currently buying loans in the primary or secondary markets?
Goss: This is a key differentiating feature from 2024. At the start of last year, most loans were trading below par, so managers could build portfolios at attractive levels to fuel new primary issuance. That's not the case this year, but it's difficult to build a portfolio entirely from the secondary market, because half or more of the loans are trading above par. People are very focused on the M&A pipeline and new deals that will eventually get securitized in new issuance CLOs.
We're also seeing more repricing activity on the loan side that's driving spreads down.
ASR: Have you seen any this year?
Goss: In January there's been [over] $10 billion in deals coming to market, most of it not new credit but rather incremental debt that borrowers are putting on their balance sheets. The biggest loan so far this year for Clarios International went toward a $4.5 billion dividend to its private equity owners.
What people are really looking for are new loans stemming either from companies being taken private or spinoffs from larger companies.
ASR: How could rates staying higher for longer impact CLO issuance?
Goss: We've had some rate cuts, and the market's certainly not pricing in any more cuts imminently. However, I think rates stabilizing at this level is a factor in terms of sponsors looking to transact in the M&A market, and then the question becomes whether the loans come to the broadly syndicated loan (BSL) loan market or private credit. [Better priced] BSL has taken some market share over the last six to eight months, but pricing is converging.
The question becomes whether the loans come to the broadly syndicated loan (BSL) loan market or private credit.
ASR: How does the LATTICE proprietary platform benefit Pretium?
Goss: It has captured every trade CLO managers have transacted since the GFC, and we can assess the unlevered returns of any manager by loan tranche over the life of the asset.
ASR: What distinguishes it from technology used by other managers?
Goss: Ours functions in real-time. Our portfolio managers can input a thesis of where we're going to buy and sell individual credits, and as we go through a volatile period like last year, LATTICE sends us a list of the biggest price moves in our portfolios, and whether they've moved outside the bands we've set. It really throws out ideas that trigger further analysis and discussions around actions to take. We try to keep our technology six to nine months ahead of what's being sold in the market right now.
ASR: How does Pretium view the big increase in liability manage exercises (LMEs), which place some, often smaller lenders in disadvantageous positions?
Goss: Two parts to that answer. One, we believe we're past the peak of the default cycle, so LMEs should be on a downward slope, although we believe they are here to stay. And secondly, the recent 5th U.S. Circuit Court of Appeals ruling draws a line in the sand, and I'm anticipating less discrepancies in recoveries based on the size of positions or whether the CLO manager is the favored group or not.
Last year started with CLO managers aggressively coming to market with new issues, then over the back half there were a lot more refis and resets.
