No let-up for the CLO boom

Francoise Devenoges is a portfolio manager at Man GLG, the discretionary investment management business of Man Group, where she is responsible for co-managing and developing the European CLO platform. She discusses her views on the state of Europe’s CLO market

How do you view prospects for European CLO issuance for the rest of this year?

Assuming a continued benign macroeconomic environment, we believe it could be another strong year for CLO issuances. 2017 recorded €20 billion in new CLO issuances – the highest level since the global financial crisis.

In the absence of a negative macroeconomic catalyst, the positive environment could continue to drive strong credit fundamentals. Coupled with the increased CLO liabilities investor base, we believe this further supports our view.

Alongside new issuances, the European CLO market could see another busy pipeline in terms of refinancing and resets, driven by CLO spreads tightening and the need to reduce funding costs in light of tightening spreads on underlying assets.

What are the main factors for investors to consider when pondering making commitments to CLOs?

We would recommend a fundamental understanding of CLO mechanisms and specific risks related to the notes considered for investment. Despite more standardised documentation among 2.0 CLOs, we would recommend that investors thoroughly review the various clauses in the documentation, which can vary among issuers.

This review should be in conjunction with an in-depth analysis of the underlying portfolio. Ultimately, we believe it is important to select an experienced manager with an established track record.

What market factors, not already mentioned, are front of mind currently?

Monitoring the macroeconomic environment, specifically GDP growth and consumer confidence, is always of particular importance to us. Europe has been supportive in terms of growth – this has been evident across the majority of companies in this region, which have reported solid credit fundamentals.

Nonetheless, there is increased uncertainty arising from decreasing quantitative easing, as well as the impact of Brexit on the UK and European economy. In addition, the demand and supply of leveraged loans remains imbalanced, driving spread tightening as well as borrower-friendly documentation and increasing the risks for lenders.

What are the keys to successfully building a CLO business over the long term?

We believe the primary key to success is longstanding experience and thorough expertise of the team.

Expertise is required across the board, in particular portfolio management, credit analysis, credit operations and legal. Credit and industry views constitute the backbone of a sound portfolio as well as the engine to trade ideas that will be implemented on the portfolio management side.

The complexity of CLOs requires a thorough understanding of the legal documentation to balance any trades implemented with respect to the compliance tests.

Crystallising gains and minimising losses and trades to improve the portfolio constituents are a constant quest. This, coupled with cash management, reinvestment and rapid settlements of assets, drives potential performance and play a key role in building a successful CLO business.

Another potential advantage is having an experienced team that has managed CLOs before, during and after the credit crisis.

Finally, we believe that the business should also have a measured growth strategy, which allows for selective credit picking, higher diversification and lower overlap across portfolios.