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In recent days, the spread of Covid-19 and warnings from the World Health Organization, US CDC, and other health agencies have caused investors to reprice risk assets. Although global equity and sovereign debt markets reacted faster to the developments, corporate credit markets have now begun responding to an outbreak that seems increasingly likely to have … Read more

Despite their strong fundamental performance, CLOs continue to trade at wider spreads than similarly rated corporate bonds or securitised products, particularly in Europe. We believe that complexity, “guilt by association” to CDOs or their hybrid ABS/corporate nature may explain this persistent yield premium but regulatory and policy decisions are also relevant. In this note we … Read more

CLOs have received positive attention in the press1 of late following the release of the Bank of England’s latest Financial Stability Report2 in July. As highlighted in the Bank of England’s report, current CLO structures (“CLO 2.0”, issued from 2011 onwards) are much more robust compared to pre-crisis structures (“CLO 1.0”, issued before 2009). As … Read more

THE VALUE OF INTEREST RATE FLOORS IN EUROPEAN CLOs While we typically think of CLO debt as a floating-rate investment paying a margin over Euribor, since 2015 most European CLOs have included a Euribor floor set at zero. They have thus effectively paid fixed rates of interest since 2015 when 3m Euribor dropped into negative … Read more

WHAT IS HAPPENING WITH AAA CLOs? In this Reflections we explore the reliance of the CLO market on Japanese investors, the underperformance of CLO AAAs compared to other credit products during 2019 year-to-date and recent moves towards a more granular and diverse AAA investor base. CLO MARKET RELIANCE ON JAPANESE BANKS We have often highlighted … Read more

Managing credit risk and avoiding credit losses are key drivers of CLO returns. A strong focus on potential sources of credit risk is essential when considering investments at this point in the credit cycle. Contrary to general expectations of widespread defaults, Fair Oaks Capital believes that corporate default losses over the next five years will … Read more

While responsible investing is increasingly gaining traction among investors and asset managers, the CLO market has been slow to embrace it. In this note we explore the reasons for this and the steps that some CLO managers are taking to become more responsible investors. BACKGROUND Responsible investing is the incorporation of ESG (Environmental, Social, Governance) … Read more

Much has been written over the last two years on the prevalence of “cov-lite” loans and, more recently, on other weaknesses in loan documentation. Below are what we believe to be the key points for investors considering exposure to the loan market. SUMMARY Senior secured lenders have lost some of their control over borrowers through … Read more

US bank loans suffered significant losses in November and December 2018 as a result of changes in interest rate expectations and outflows from ETFs and open-ended loan funds (please see our December issue of Reflections). European loans and US and European CLO spreads widened in sympathy, despite limited trading flows and the lack of negative … Read more