CLOs at ‘Bargain’ Prices as Leveraged Loans Rally, Babson Says
March 29, 2011, 10:10 PM EDTBy Sarah McDonald
March 30 (Bloomberg) -- Collateralized loan obligations offer investors a “bargain” as relative yields on the notes fall amid a rally in leveraged debt, according to Babson Capital Management LLC.
There’s an opportunity “to pick up what are fundamentally strong assets at bargain prices,” Matt Natcharian, head of the structured credit team at Babson, which manages $133.1 billion of assets, said in an interview. “If you can afford a little bit of illiquidity, you can pick up significant spread.”
The extra yield offered by the highest-rated portion of CLOs narrowed to 175 basis points more than the benchmark London interbank offered rate this month, from 215 basis points on Dec. 30, according to Morgan Stanley data. Spreads on the notes surged to 725 basis points in April 2009 amid the global credit freeze, from a low of 23 in 2007, the data show.
Moody’s Investors Service may change the way it rates CLOs -- a type of collateralized debt obligation that pool high-yield loans and slice them into securities of varying risk and return -- possibly leading to rating upgrades of as much as five levels, it said in a March 22 report.
Prices of leveraged loans, rated lower than Baa3 by Moody’s and below BBB- at Standard & Poor’s, rose 61 percent to an average 95.41 cents on the dollar as of March 28 from a low of 59.2 cents on Dec. 17, 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 Index. They reached 96.48 cents on Feb. 14, the highest level since November 2007.
‘Significantly’ Cheaper
While CLOs have rallied along with the underlying loans, they are still “significantly” cheaper, Springfield, Massachusetts-based Natcharian said in a phone interview from Melbourne, where he was visiting Australian clients.
“The sum of the CLO tranches should trade at an equal price to the sum of the bank loan assets that directly back those tranches, but they don’t,” he said.
Blackstone Group LP’s GSO Capital Partners LP and Apollo Global Management LLC are among investment firms that have been able to raise CLOs since losses on subprime mortgage securities cut investor demand for so-called structured products that contributed to more than $2 trillion of losses at financial firms amid the credit crisis.
During the leveraged-buyout boom in 2007, $91.1 billion of CLOs backed by syndicated loans were sold in the U.S., with issuance tumbling to $1.22 billion in 2009.
Australian Fund
REST Industry Super, an Australian pension fund with more than A$18 billion ($18.5 billion) of funds under management, started investing in bank loans and structured notes in 2008 on the prospect of “equity-like returns” over a three to five- year period, according to Chief Executive Officer Damian Hill.
“The sharp rebound in credit markets that began in early 2009 has resulted in very strong returns from our investments in this area,” Sydney-based Hill said in an interview. CLOs “will continue to be an attractive proposition,” he said.
REST has about 6 percent of assets under management invested in bank loans and structured securities, Hill said. The fund has 1.9 million members, more than any other Australian pension fund, according to its website.
“CLOs are a valid asset class, as long as the individual making the investment decision understands the risks and has the skills to analyze them,” said Scott Rundell, head of credit research at ING Investment Management in Sydney, which manages about $15 billion of fixed-income assets. “It’s all about the risk-return trade off and understanding all the moving parts.”
--With assistance from Kristen Haunss in New York. Editors: Ed Johnson, Will McSheehy
To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.
To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net.
