CLO tech firms step up as investors hone in on doc terms
The complexity of CLO documentation, and the need for easy access to deal info is encouraging tech providers to step into the breach and offer solutions to simplify the time-consuming processes of CLO investing. As managers adapt their deals to handle the fallout of the pandemic, good tools to handle documentary complexity have become all the more important.
Three examples of the growing market in CLO tech providers are KopenTech, a Los-Angeles based fintech company, Dealscribe, a London-based company founded in the last year, and Eigen Technologies, a London-based startup using natural language processing.
All these promise to ease the difficulties in CLO investing, by making the long prospectuses and detailed differences in legal language far easier to navigate — particularly crucial when managers are tweaking key terms on loss mitigation and workout loans, and when investors are increasingly scrutinising ESG provisions.
The US CLO market, which has grown to $700bn over time, is in need of answers from technology. Despite the low issuance in 2020 at $85bn, the primary market has proved to be resilient and has been in a recovery phase since Q4 in 2020.
However, some participants believe that the market is still lacking some of the benefits technology can bring to the investing process.
Info in one place
"The interesting part for me is that a CLO investor 15 years ago would have received information about upcoming new deals the same way they would today," said James Vogl, head of product at KopenTech. "Bilateral conversations with broker-dealers are difficult to track and information can be easily missed. In the meantime, however, the CLO market has grown drastically. In order to become more liquid and to keep growing, it needs convenient technology. Our idea is to give investors access to critical information in one centralized location."
KopenTech was born in 2018 with the intention to simplify structured products and make the CLO refi process more transparent, faster, and cheaper with the Applicable margin reset (AMR) auction developed by Sancus Capital Management and run by KopenTech’s online platform.
Alongside with AMR auction, the fintech has developed a BWIC trading platform and it has now entered the primary CLO market with 'Issuance Monitor,' a tool currently live on the KopenTech BWIC platform.
The feature gives full deal information across new issuance, resets and refi. Instead of ton of emails and chaotic communication, Issuance Monitor gathers deals info just in one place to allow investors to save time and search quick.
"Issuance Monitor is a centralized repository for CLO issuance to help professionals analyse deal information and collaborate effectively – all online," said Vogl.
The feature has key deal and portfolio details, including key metrics and underlying collateral information; it presents info about quality tests, fees, summary of the transaction with key parties and updated deal documentation, said KopenTech.
The company, in the meantime, is also working on another tool that would allow investors to submit indications of interest to broker dealers through the platform.
Delving into docs
The latest arrival in the CLO tech space is Dealscribe, a firm founded in July 2020 by Mike Peterson. With more than 20 years spent in journalism, most of them covering CLOs, Peterson founded a tech-research firm to facilitate the analysis of hundred pages of CLO documention, following his exit from Creditflux, the publication he founded, which competes with GlobalCapital.
“Speaking with CLO market players makes me realise that there are always some aspects of documentations that CLO participants don't know and that can make a difference," said Peterson. "Finding info in the CLO doc, finding what CLO players need has been always very hard and time consuming even for people who know CLOs very well. We created Dealscribe to solve this problem: to find information quickly and easier.”
Dealscribe uses machine learning to extract information in CLO documents and it has a research side, providing documentary analysis and special focusses.
The platform, where docs are uploaded, is filtered by questions and lead to the answer. “What's the limit for bonds? The user can go straight to the answer and can also compare the same topic across the market,” explained Peterson in one example.
The London-based company has a presence in the US, where CLO docs are slightly different compared to the European market.
"One of the biggest concerns for US CLO managers is not being able to participate in workout situations and that a restructuring can be done in a way that could disadvantage CLO managers. CLOs are adding language to allow more flexibility in workout,” Peterson said.
AI for CLOs
The Covid era has shifted the attention of US CLO managers towards becoming better equipped to extract value from corporate restructuring negotiations and how to seek more influence on the outcome of restructuring. New CLOs are adding extra space for loss mitigation loans while older deals are seeking investor consent to amend their docs.
"In Europe, the loss mitigation provision is by far the most common question," said Lewis Z. Liu, co-founder and CEO of Eigen Technologies, a startup that uses natural language processing (NLP) to teach an algorithm to analyse and subsequently answer questions from thousands of lengthy legal and financial documents.
"On the US side, equity investors in particular want to know whether or not they can participate in restructuring," Liu said. "Europe is more homogeneous in terms of docs and by Q4 90% of CLO had loss mitigation provisions. In the US we don’t have enough data points to understand the trends of how the deals are being amended, but the market is very focused on that and the amendment right is another big topic."
Eigen Technologies was founded in 2014 by Liu, and Jonathan Feuer, a former managing partner at CVC Capital Partners, who is the company's chairman. Since then, the startup has raised over $60m from Goldman Sachs, Temasek, Lakestar, Dawn Capital and ING.
Eigen extrapolates data from the loans to CLOs, including all of the docs in that lifecycle. In few minutes it is possible to compare price performance over time, to see which linguistic terms lead to price performance and how certain legal terms impact the weighted average price, just to mention a few features.
"For example, whether or not cross-default applies in the Cov-Lite loan definition has a 1.5 point delta in the WAP," Liu added.
Among the most frequent questions Eigen is getting from investors are on ESG and Libor transition.
"ESG in the US has started to pick up since Q3 in 2020. The main questions are around definitions, calculations, requirements, such as carbon footprint reporting.
My expectations," Liu said, "are that some ESG metrics will start to flow into the portfolio profile test."