Last year, CLO managers started to seek more influence on the outcome of restructurings, baking additional flexibility into deal documents to avoid being blindsided by more flexible distressed debt funds better equipped to extract value from corporate restructuring negotiations.
Debt and equity investors at the conference emphasized the astonishing recovery of the sector, but they also highlighted that 2020 has showed a weakness in CLO documentation that has led to a communal effort to revamp the terms of the vehicles.
Last year will be remember as the year where the CLO market "started to defend itself from hedge funds and other actors," said Joseph Trunzo, vice president and CLO counsel at Carlyle's credit unit.
"99% of CLOs were completely handcuffed with what they could do in workout situations, and hedge funds and other actors capitalized on that. Recoveries were severely damaged, and assets and collateral were taken away from CLOs," said Trunzo.
Through creativity and the pioneering work of some managers, the CLO market has gained ground, with deals that have added extra space for loss mitigation loans and more flexible language.
"We have a permitted equity security concept, which existed prior but it is now in every deal. We have also got the loss mitigation concept, where debt and equity investors have found a common ground," Trunzo said, emphasizing the recent doc changes and how all the parts of the capital stack come together "to coalesce around a market solution."
The positive developments for the industry have been highlighted by Pramit Mukherjee, a portfolio manager at the insurance company Converge RE.
"Insurance companies as major investors in the asset class have taken notes of that," he said during the panel moderating by Dan Wohlberg, director at Eagle Point Credit Management.
The investor, together with the other panelists, pointed out why CLOs are becoming more attractive.
Improved CLO fundamentals, massive spread tightening and the ability of managers to actively 'manage' deals have led the CLO sector to recover very fast and to be particularly attractive, said Komal Shahzad, vice president and CLO tranche analyst/trader at PineBridge Investments.
"I do see life insurance companies becoming even more active in the CLO market," added Mukherjee, "not only as senior bond investors but also at the mezz and equity level. It is an extremely attractive sector based on risk adjusted returns. I see the allocations increasing going forward," he said.
On the European side, Vedanta Bagchi, director in Commerzbank's Investment office investing in US and EU CLOs, highlighted the spreads tightening on triple-A EU deals able to pass from 200bp to 77bp in one CLO, and the "massive" appetite for the structure.