Private Capital Call

News reached us from Mars of the first powered Earth aircraft to fly on another planet. Ingenuity, a helicopter with four foot wide blades (and carrying a small swatch from the original Wright Brothers bi-plane), hovered at ten feet for 30 seconds then came back down.   

“What the Ingenuity team has done,” a NASA official said, “is give us the third dimension.”  

Here on Earth #CLOs​ are also three-dimensional. Their capital structures start with the least risky, lowest-spread debt at the top of the cash flow waterfall, to more risky, higher-spread liabilities and equity at the bottom. There are also active primary and secondary markets for these investments, with spreads depending on market conditions...

Leveraged lending is competitive. But it pales in comparison to the 2021 Mrs. Sri Lanka pageant. Reigning Mrs. World champion, Caroline Jurie yanked the tiara off newly-crowned winner Pushpika DeSilva, charging Mrs. DeSilva was not married. Mrs. DeSilva fled the stage in tears.  

Order was eventually restored. Mrs. DeSilva reclaimed her crown, and Mrs. Jurie resigned hers. We look forward eagerly to the 2021 Mrs. World pageant to be held later this year…in Sri Lanka.  

Meanwhile in the less dramatic world of middle market #CLOs​, managers are working through the Covid environment and positioning for the rebound...

By blocking the Suez Canal last month, the Ever Given made headlines, creating a massive shipping traffic jam.   

Three football fields long and weighing 250 thousand tons (by comparison, the Statue of Liberty is only 125 tons), the monster container vessel is the new global transportation reality: 90% of the world’s goods travel by water.  

This marine mishap reminded us of #CLOs​. Here are vehicles that transport 70% of all leveraged loans, each CLO containing hundreds of assets. They also risk getting beached when market winds blow sideways. ...

So what happened to #CLOs​ during Covid? When the world stopped last March, as our own CLO manager, Kelli Marti, told us, “everyone looked first to their health of their portfolios. The key was preserving the value of the underlying collateral. 

“Two things mattered,” she said, “triple-C exposure and OC cushions. If triple-Cs are too high, fund flows may be redirected, suspending payments to the lower debt and equity tranches.”   

Before Covid, 5% of the LSTA Leveraged Loan index was rated triple-C. Adding B- assets gets you to a combined 25%, up from 15% two years earlier...

“Anytime loan market technicals shift, there’s always a view that CLOs are the end of Western civilization as we know it.”  

That’s what a top #CLO​ manager told us about his experience over several decades. Regardless of actual performance, CLO’s regularly get hauled out by the media for reckless behavior associated with“risky loans.”  

Back in 2014 we published a white paper – “Why CLOs Matter” – that showed how CLOs have adapted to changing market conditions over their history and had a remarkable track record over many business cycles....

We wrap our special 2021 outlook with #privatecredit​.  

Its value proposition was fully supported last year, coming through the pandemic mostly unscathed. But with conditions becoming more issuer-friendly, how will private credit terms be impacted?  

When liquid loan yields contract, illiquid loan yields tend to follow. But they carry at least a 100 bp premium, and at least 200 bps vs. high yield bonds...

We continue our special series on The Great Reception, a year that’s welcoming all investors. This week we look at the capital markets: funds flow, asset behavior and deal quality.   

With each passing day, the light at the end of the COVID tunnel grows brighter. That newfound optimism has put upward pressure on interest rates.   

As our Chart of the Week shows, the ten-year Treasury is up 70 bps, while investors anticipate an earlier Fed rate hike, now mid-2024.  

Higher rates have chilled high-yield bond funds. There have been $4 billion of redemptions six of the past seven weeks, per S&P LCD. Bond volume is also off, from $60 billion last June to $24 billion so far this month....

What have you missed most over the past few months? Well, if you said “Grape-Nuts” we feel your pain. Our beloved cereal has gone missing from supermarket shelves across the US.  

First produced in 1897 Grape-Nuts accompanied Sir Admiral Byrd to Antarctica and Sir Edmund Hillary to Mount Everest. But don’t worry. They’ll be back. The cereal, that is.   

In the meantime Post Foods is running a contest. Ten lucky winners will receive a year’s free Grape-Nuts supply. Everyone else gets a coupon.   

Credit investors, meanwhile, are hoping for a year’s healthy supply of deals. And it looks like both the economy and markets are cooperating...

We conclude our special series, “Five Biggest #PrivateCapital​ Surprises of 2020,” with:    

Surprise #5: The M&A Big Bang  

Last July published a white paper on COVID-19 and M&A Activity. It was called “COVID-19 and M&A Activity”. Besides logistical challenges, there were worries about second and third infection waves. “We’re expecting a light second half,” one banker told us.   

Ok, so that didn’t happen....

We continue our special series with the fourth of our “Five Biggest #PrivateCapital​ Surprises of 2020:”  

Surprise #4: Which Industries Mattered?  

For experienced credit managers, diversity is a key investing principle. The question coming into last March’s downturn was, have we made the right decisions on industries to lean into and out of?  

Generalists avoid cyclicals such as energy, retail, and high-end consumer. Unlike the Great Recession, though, the COVID cycle impacted businesses where consumers had to leave their homes...