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CLO managers on the defensive

CLO managers are in defensive mode and have little appetite for the bargains on offer in the energy and commodities sector, attendees at ABS Vegas’s CLO credit selection roundtable heard on Monday.

The idea that weakness in the commodities sectors has created investment opportunities for CLO managers and arrangers was broadly rejected at the roundtable.

“There’s very little incentive for managers to take on risk. Now is the time to be defensive,” said Matthew Miller, managing director at Crescent Capital Group.

Price declines in the energy and commodities sectors has “probably been overdone”, said Paul Travers, portfolio manager at Onex Credit Partners, but he said that was no reason to be drawn to the sectors, given the fundamental reasons behind the decline.

“The best opportunities are when there is fear in the marketplace,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. But any opportunities in energy, metals and mining would be “idiosyncratic”, he said, with those markets undergoing sectoral shifts. “The asset classes are cheap, but I can’t see the catalyst that would cause prices to reverse. No one wants to step in and catch a falling knife,” he said.

Investors are also lacking any appetite for the sector, said Sean Solis, partner at Dechert. “Even when there are opportunities, people are not ready to call the bottom. Investors have been saying, ‘It’s just not worth it yet,’” he said.

Oh said there was a clear split in the credit fundamentals between manufacturing and other segments. “We’re effectively in a manufacturing recession,” he said, adding that the strength of the dollar had hampered the ability of US manufacturing companies to compete globally.

The panel members were bullish in their outlook for the market, despite energy related weakness, after moderator Debra Rappoport-Bigman, partner at PwC, pointed out comparisons between the current credit cycle with the state of the market in 2009.

“In 2008 and 2009 you were seeing companies with quarterly drops of 20%-25% in revenue, and we’re just not seeing those drastic fundamental changes in businesses as we did then,” said Onex's Travers.

The economic outlook is also much stronger, according to Oh, who said the commodities weakness was out of sync with the wider macro picture. “If you strip out commodities, you would think we’re in a bullish cycle,” he said.

Energy-related volatility will expose the credit selection approaches taken by different CLO managers. The market is now seeing much greater variation in CLO portfolio composition, said Amit Roy, head of CLO origination at Goldman Sachs. “The divergence seen in portfolio performance is striking,” he said. CLO managers are increasingly wary of the retail and healthcare sectors, delegates heard.