Broadly Syndicated Loans
CLO’s underlying loans, often linked to buyouts or acquisitions, possess advantageous attributes:
- Seniority: senior position in corporate borrower’s capital structure, in case the company defaults, they are the first one to get paid.
- Secured: first lien security on corporate borrower's assets.
- Floating rate: enables to mitigate interest rate risk associated with fixed rate bonds.
- Low LTV: average loan to value ratio of ~40%-60%.
Leveraged Loan Default Rates Across Economic Cycles
US Median Loan Defaults within CLOs vs LTM Loan Defaults
Source: Pearl Diver Capital, Morgan Stanley Research, Moody’s, S&P LCD
Recovery Rate by Seniority (25-yr avg.)
Source: J.P. Morgan; PitchBook Data, Inc.; Bloomberg Finance L.P. Notes: Recovery rates are issuer-weighted and based on price 30 days after default date. 2009 Adj. recoveries are based on year-end prices. Typical loan characteristics and CLO structural features are provided for illustrative purposes only and is a generalization of the structure of the CLOs in which PDCC will likely invest. The actual terms of any loan and/or CLO PDCC invests in may vary. Past performance is not indicative of future results.
CLO Structure
CLOs resemble a simplified bank. Corporate credit loans are securitized and form the CLO assets. The interest and principal of those loans are then paid to the CLO liabilities i.e., the tranches. It is worth noting several characteristics of this structure:
- Cash-flow CLOs fund purchase of a diverse portfolio of senior secured corporate loans
- Achieved through issuance of long-term CLO notes/liabilities, providing stable funding for CLO equity investments
- Loan assets acquired and actively managed by CLO manager
- No forced sales or margin calls based on the performance of loans held by CLOs
- Optionality to call or refinance liabilities lies with CLO equity
CLO Market
Over the years, collateralized loan obligations (CLOs) have grown to a significant asset class, especially in the U.S where it holds around two thirds of the $1.4 trillion broadly syndicated loan market.
U.S. Broadly Syndicated Loan Market Size by Year
Dollars in millions. Source: S&P LSTA.
Globally, the outstanding CLO paper stands at approximately $950 billion in the U.S. and $215 billion in Europe.
U.S. CLO Market Size by Year
Dollars in millions. Source: Pearl Diver Capital, Moody’s. Calculated based on outstanding tranche notional using the latest available trustee report for each CLO as of corresponding year.
Why CLO Equity?
- Potential for strong absolute risk-adjusted return with high quarterly cash distributions
- Hedge against higher rates
- Expected low correlation against fixed-income and equities
- Smart way to access corporate credit markets
Historical U.S. Cash Flow CLOs - Quarterly distributions (2018Q1 - 2023Q4)
Presented numbers are annualized. Quarterly distributions were calculated by dividing total cash received by CLO Equity and dividing it by its notional amount, results were averaged over outstanding CLOs. Source: Moody’s, Pearl Diver Capital. There can be no assurance that the trends and/or performance illustrated will continue or that future investments in CLO equity will perform comparably.
The Advisor's Approach
Our data driven approach complements fundamental credit analysis and cashflow modelling with machine learning techniques
Proprietary Data Lake
Fully credit risk priced 2,000+ leveraged loan database updated daily, combined with fundamental credit analysis of individual loans and 200+ CLO portfolio DD calls annually
Scraped database of ~150,000 CLO trustee reports updated daily
Multi-stress cashflow library for 17,000+ CLO tranches, updated daily
Automated NLP based real-time CLO tranche trade data capture engine
Cutting Edge Machine Learning Algorithms
Outcomes
NAV preservation & credit loss minimisation
Agile relative value trading
Optimised portfolios for all-weather risk adjusted returns
Alpha captured from CLO manager style and performance analysis
