CLOs edge closer to digitalization after success of AMR

Digitalisation and its impact on traditional practices was front and centre at a CLOs and leveraged loan event at the SFVegas conference on Monday, where speakers were focused on the advent of digital platforms, what is possible and what is premature.

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Olga Chernova, founder and CIO of hedge fund Sancus Capital Management in California, discussed the repricing of a deal using an applicable margin reset (AMR) feature, a new method of refinancing that she helped to pioneer in 2016.

Rather than refinance a CLO in the traditional way, with an arranging bank repricing the bonds and placing them with investors, the AMR allows for an open auction format, with investors submitting the minimum spreads at which they would be willing to hold the bonds.

“The attraction is the cost savings and the efficiency,” she told an audience packed with investors, issuers, and rating agency officials.

The first AMR auction, held on a platform run by KopenTech, took place at the end of January, with TCW repricing $351.5m of bonds originally sold in 2019 via MUFG.

“The auction was successful and it attracted more dealers than we expected. We plan the second AMR auction at the end of the month,” said Chernova.

The AMR auction is the first sign that the CLO space is hitting refresh, moving towards a more digital format that many other fixed income asset classes have developed over the course of the past decade.

An audience member later asked about the possibility of blockchain and artificial intelligence coming to CLOs. Jian Hu, head of new ratings for US corporate asset securitization at Moody’s, said that it could “potentially” become more common, citing a recent Moody’s report.

Meanwhile, a wave of refinancings and resets have hit the market since the beginning of the year. Speakers at SFVegas, both managers and investors, agreed that the trend will be significant in the first part of the year, fuelled by tightening spreads on triple-A paper, with panellists agreeing that the senior notes are still the most attractive for investors.

“Triple-A notes look cheaper,” said Daniel Wohlberg, director at Eagle Point Credit Management.

“For us, triple-A and double-A keep the best value,” added Edwin Wilches, portfolio manager at Prudential. Investors also discussed how they are going about choosing managers and how to differentiate between a crowded field based on investment style and approach to the leveraged loan market.

“I look for a manager that actively trades a portfolio and who understands the market,” said Wohlberg.

“It is knowing in advance who is going to be right,” said Kevin Croft, vice-president and head of structured products at American Equity. “We tend to focus on managers with the largest staff, that have issued many deals and move assets effectively.”