CLO investors thrive in 2021

CLO investors thrive in 2021

Friday 17 December 2021 12:42 London/ 07.42 New York/ 20.42 Tokyo

An extract from SCI's new CLO Markets service

2021 has been a good year for CLO investors, after very mixed results last year when some funds failed to fully recover from the sharp declines recorded in March and April 2020. CLOs are now present in a range of funds – from diversified macro funds to specialised credit funds, in addition to an increasing number of pure CLO funds – and helped lift 2021 returns. The month of November was disappointing, but not enough to spoil the party.

"This has been a strong year for CLO equity investors. Very few companies defaulted this year, which led to sizeable cash distributions for equity investors like Flat Rock throughout the year,” says Shiloh Bates, a partner at New York-based Flat Rock Global and cio of its Flat Rock Opportunity Fund.

CLO transactions performed well, better than many had anticipated; but at the same time, the CLO bonds looked cheap (or less expensive) than potential alternatives. 

In 2021 the appeal of CLOs was their relative value, according to Mark Hale, ceo and cio of Prytania Asset Management, a securitised credit specialist.

Financial markets in general and spreads in the more conventional ABS sub-sectors specifically rallied quickly in the months that followed the first COVID-induced lockdown, but CLOs lagged and looked comparatively wide for a prolonged period, explains Hale.

CLOs also looked attractive relative to non-ABS products such as corporates. According to BNP Paribas, triple-A CLOs offered good value in 2021 relative to corporate cash credit during most of the year, although the sell-off in corporates at the end of November provisionally made European CLO AAA look slightly less attractive.

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(source: BNP Paribas; the ratios are calculated as the ratio of (1) CLO spread in Secondary over (2) the relevant Cash index. The ratio is compared to the average ratio (over the past ~6 years). If the current ratio is above the average, that implies a Cheap bias)


Allocations in 2022 are unlikely to change much, but new entrants may well increase demand for the product further. Volatility, however, may make the ride bumpier.

David Nochimowski, head of Global CLO & ABS Strategy at BNP Paribas, expects CLOs to remain attractive in 2022 and outperform credit; but he cautions that the tapering could cause a widening across the board later in 2022.

Carmignac’s exposure to CLOs at the firm level is expected to remain stable in 2022. “We find that the credit markets are expensive and see a higher risk of a repricing. CLOs would not remain immune to such move and we therefore maintain a cautious stance,” says Florian Viros, a fund manager within Carmignac’s fixed income team.

The CLO investor base may continue to broaden. “We saw this year more interest in CLOs from potential new entrants, enquiring mostly about Triple-As. Japanese banks could be more active next year,” comments Nochimowski.

He also thinks that CLOs could benefit from the new European rules on ESG disclosures and reporting.  In his view, CLOs structured as Article 8 funds could attract more demand from investors keen to increase their exposure to ESG products.

This story is an extract from a longer article on SCI’s new CLO Markets service, which provides deal-focused information for the primary and secondary CLO markets. Offering intra-day updates and searchable new issue/refi/reset databases along with BWIC pricing and commentary. For a free trial to CLO Markets please contact Jamie Harper.


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