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| Stephan Schumann |
Frankfurt-based Deka Investment plans to invest €100 million over the next month and sees collateralized loan obligations as one of the few asset classes that still offers value. "CLOs have rallied along with the rest of credit, but still have some room to go," said Stephan Schumann, head of structured products. Schumann is responsible for the team managing Deka's €2.5 billion in euro-denominated asset-backed securities and collateralized debt obligations, benchmarked against Euribor. CLOs have rallied less than other asset classes, noted the portfolio manager, with triple-B CLO spreads tightening from 300bps over EurIBOR to 160 bps over since the beginning of the year, whereas corporate spreads are now trading at around 80bps. "Investors got burned by multiple downgrades of badly diversified asset pools in early investment grade and high-yield CBOs, and therefore became wary of the CDO asset class as a whole," Schumann explained. "That sweeping judgment is inappropriate, as the loans in CLOs are senior in the credit structure, so even during the CBO downgrades, CLOs remained quite stable." He added that if there is an economic upturn in Europe, CLOs are an asset class that is still attractive on a risk-reward basis.
According to Schumann, the quality of a CLO manager is critical to the investment decision. "The market is pretty narrow, so it is important to minimize overlap in transactions, and the manager's ability to source loans is key," he said. He mentioned Alcentra and Intermediate Capital Group as leaders in the field, and also noted that BNP Paribas' deals tend to be interesting because the bank has unique access to smaller loans.
Deka will not buy CDOs of either investment grade corporate bonds or combinations of bonds and asset-backed securities because the spreads on the underlying are too tight. Schumann noted that it is becoming increasingly difficult to ramp up CDOs of ABS due to the scarcity of attractively priced assets, so there is a greater likelihood that riskier product from more esoteric asset classes will be included. CDOs currently represent 10-20% of Deka's €2.5 billion in dedicated funds for structured credit.
Deka is a dedicated mezzanine investor, with a variety of portfolios rated on average double-A-minus down to triple-B. However, Schumann has been buying triple-As recently for liquidity reasons. "Given the increased cash inflow to our funds we want to have the flexibility not to buy every single-deal that comes to market," Schumann explained, adding that triple-A tranches until recently have been attractive because they have been trading above par at the break.
Away from CLOs, Schumann prefers securitizations of commercial over consumer risk, because he expects a worsening in the consumer credit cycle while the corporate cycle is improving. That said, he noted that since 60% of the MBS market is in residential mortgage-backed securities, he is not in a position to be too selective in what he buys.
