Frankfurt-based Deka Investment plans to invest EUR100 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 EUR2.5 billion in euro-denominated asset-backed securities and collateralized debt obligations.
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. Corporate spreads have tightened to a far greater extent. "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.