Elon Musk (yet another authoritarian)

[MDlaxfan76]

Elon making a statement…..”let that sink in”, clever.

https://twitter.com/elonmusk/status/158 ... 4_peb33-ow

He does make a lot of statements... Likes being the center of attention. Will be interesting to see what happens tomorrow and the day after with the deadline coming up on the trial.

... he is not the only one. RepubliCON leaders like being the center of attention. The thug faction of the party is the same way. There is no organization big enough to contain all the egos. Musk fits right in. He is far less ideological than his lovers believe. Like Trump and DeSantis, his true ideology is himself. I am beginning to think the chick in Arizona, Lake has them all beat when it comes to being an attention whore.

Envy? The man has taken us to space for far less costs, built an robust EV company, has launched satellites that we rely on globally, and you are fussing about his ego.


Friendly reminder.....Trump is a democrat/RINO.

... couldn't make it work in the democratic party.

Exactly! He moved up in the world.

up where?

[Farfromgeneva]

Elon making a statement…..”let that sink in”, clever.

https://twitter.com/elonmusk/status/158 ... 4_peb33-ow

He does make a lot of statements... Likes being the center of attention. Will be interesting to see what happens tomorrow and the day after with the deadline coming up on the trial.

... he is not the only one. RepubliCON leaders like being the center of attention. The thug faction of the party is the same way. There is no organization big enough to contain all the egos. Musk fits right in. He is far less ideological than his lovers believe. Like Trump and DeSantis, his true ideology is himself. I am beginning to think the chick in Arizona, Lake has them all beat when it comes to being an attention whore.

Envy? The man has taken us to space for far less costs, built an robust EV company, has launched satellites that we rely on globally, and you are fussing about his ego.


Friendly reminder.....Trump is a democrat/RINO.

... couldn't make it work in the democratic party.

Exactly! He moved up in the world.

up where?

To the east side, finally got a piece of that pie!

[youthathletics]

Elon making a statement…..”let that sink in”, clever.

https://twitter.com/elonmusk/status/158 ... 4_peb33-ow

He does make a lot of statements... Likes being the center of attention. Will be interesting to see what happens tomorrow and the day after with the deadline coming up on the trial.

... he is not the only one. RepubliCON leaders like being the center of attention. The thug faction of the party is the same way. There is no organization big enough to contain all the egos. Musk fits right in. He is far less ideological than his lovers believe. Like Trump and DeSantis, his true ideology is himself. I am beginning to think the chick in Arizona, Lake has them all beat when it comes to being an attention whore.

Envy? The man has taken us to space for far less costs, built an robust EV company, has launched satellites that we rely on globally, and you are fussing about his ego.


Friendly reminder.....Trump is a democrat/RINO.

... couldn't make it work in the democratic party.

Exactly! He moved up in the world.

up where?

To the east side, finally got a piece of that pie!

[Seacoaster(1)]

CNN reporting that the three executives fired by Musk are now owed $200,000,000 — probably along with the premium on their shares sold in the takeover. Nice.

[Typical Lax Dad]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

[jhu72]

... so Musk is so much in favor of free speech (excuse me while I roll on the floor laughing) ............ (I'm back) why hasn't he removed the Trump ban?? He fired the employee who was responsible for making the corporate decision.

[Farfromgeneva]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

[Farfromgeneva]

... so Musk is so much in favor of free speech (excuse me while I roll on the floor laughing) ............ (I'm back) why hasn't he removed the Trump ban?? He fired the employee who was responsible for making the corporate decision.

I mean he closed today. I’m sure firing people and throwing a circle jerk of one, saving the sperm to toss at the next baby mama he finds who’ll make him think he looks younger and cooler than he is by far are clearly top of the to do list.

My bet is he gets after Lizzo next.

[Typical Lax Dad]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

[Typical Lax Dad]

Sort of what I thought: https://www.bloomberg.com/news/articles ... reet-banks


A different group of banks realized roughly $600 million in losses for the buyout of Citrix Systems Inc. in September and were forced to hold roughly $6.5 billion of the debt. Lenders supporting the buyout of Nielsen Holdings Plc. were stuck with more than $8 billion of debt.

[Farfromgeneva]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

Yeah if Citrix is a 10-15pt loss (more on the bonds the TL B was more like 91-93/100) so they had no choice but to hold.

I shared elsewhere $24mm of AA bonds fully tangibly secured by CSV + cash + 6mo integrate reserve and couldn't get done at S + 375, they printed at + 500 on 1yr bonds on zero loss historical assets. Given there’s no liquidity in the Lev Loan market and half the CLO asset managers are in or soon to be in default on their warehouse faculties at a minimum for violating seasoning test covenants (hardly technical one of the first reasons warehouses get shut down because they’re uneconomical for the lenders unless they get the co-mgr fee income from turn at sale of assets), what’s fair value? +600?, +800? 7yr term w minimal amortization (presume standard 1%/annum which is nothing in terms of deleveraging without increasing cash flow which ain’t happening for 2-3yrs given the turn of employees within the org).

If you do the math, add in a 1-2pt bid/ask in secondary market and apply back of the napkin spread deficiency of 300-400bps x 7yrs and a 1.5% mid market fair value liquidity premium, this deal could easily have been printed at or below 80% of par which is the standard definition of distressed vs “par” loan. (20-30pts spread discount plus bid/ask could be 30pts).

Been in cap markets bond mode lately. Former life do more strategic stuff usually now but that’s how fubarred things were this week. Elon couldve closer cleanly and more cheaply 3mo ago if he wasn’t doing “Jazz Elon” and was behaving like “intelligent Elon” all year.

[Farfromgeneva]

Sort of what I thought: https://www.bloomberg.com/news/articles ... reet-banks


A different group of banks realized roughly $600 million in losses for the buyout of Citrix Systems Inc. in September and were forced to hold roughly $6.5 billion of the debt. Lenders supporting the buyout of Nielsen Holdings Plc. were stuck with more than $8 billion of debt.

Because the CLO managers can’t clear their warehouse by issuing. The banks have become distributors of debt more than holders in the last 20yrs as you know. But as mentioned as the CLO managers have full warehouses they can’t buy. Half are going out of business. The tier 2 and 3 guys are in trouble, trouble, trouble.

Talked to a guy at Comvest today who I’ve got a deal from and he said he’s got 17 spec fin deals in the pipeline and more showing up every day (“yours isn’t at the bottom but I’ve got a couple in front of you”)

LSTA 100 syndicated loan index:

https://www.lsta.org/content/daily-pric ... 1666995109

Primer from tier 3 manager who’s taking their book

What is a CLO?

Put simply, a CLO is a portfolio of predominantly leveraged loans that is securitized and managed as a fund. The assets are typically senior secured loans, which benefit from priority of payment over other claimants in the event of an insolvency. Each CLO is structured as a series of tranches that are interest-paying bonds, along with a small portion of equity.

CLOs originated in the late 1980s, similar to other types of securitizations, as a way for banks to package leveraged loans together to provide investors with an investment vehicle with varied degrees of risk and return to best suit their investment objectives. The first vintage of “modern” CLOs – which focused on generating income via cash flows – was issued starting in the mid- to late-1990s. Commonly known as “CLO 1.0,” this vintage included some high yield bonds, as well as loans, and were the standard CLO structure until the financial crisis struck in 2008.

The next vintage, CLO 2.0, began in 2010 and changed in response to the financial crisis by strengthening credit support and shortening the period in which loan interest and proceeds could be reinvested into additional loans.

The current vintage, CLO 3.0, began in 2014 and aimed to further reduce risk by eliminating high yield bonds and adhering to the Volcker Rule and other new regulations. In 2020, the Volcker Rule was further amended, and high yield bonds are now allowed back into CLOs. Currently, few CLOs allow for investments into high yield, and those that do generally limit the exposure to 5%-10%. To compensate for the exposure to high yield, these CLOs have increased levels of subordination to better protect debt tranches. Vintages 2.0 and 3.0 represent the biggest chunk of the market, with about $800 billion in principal outstanding, while less than 1% of the market remains in CLO 1.0 vintages.1

The vast majority of CLOs are called “arbitrage CLOs” because they aim to capture the excess spread between the portfolio of leveraged bank loans (assets) and the classes of CLO debt (liabilities), with the equity investors receiving any excess cash flows after the debt investors are paid in full. The market for arbitrage CLOs is valued at $959 billion globally, with about 83% issued in the US and 17% in Europe.2


CLOs Get Better With Age
US CLO vintages 2.0 and 3.0 represent the biggest share of the market today

US CLOs Outstanding
Source: BofA Merrill Lynch Global Research. As of 30 June 2021.


Leveraged loans: more than just collateral

Leveraged loans are more than simply the underlying collateral for CLOs: They’re the fuel that powers CLOs’ attractive income streams and the first of several levels of potential risk mitigation built into the CLO structure.

Standard & Poor’s defines leveraged loans as senior secured bank loans rated BB+ or lower (i.e., below investment grade) or yielding at least 125 basis points above a benchmark interest rate (typically Libor3 or SOFR in the US and Euribor in Europe) and secured by a first or second lien.4 Several characteristics make leveraged loans particularly suitable for securitizations. They:

Pay interest on a consistent monthly or quarterly basis;

Trade in a highly liquid secondary market;

Have a historically high recovery rate in the event of default; and

Originate from a large, diversified group of issuers.

As of 30 June 2021, the amount of leveraged bank loans outstanding was $1.26 trillion in the US and €252 billion in Europe.5

Who issues, manages, and owns CLOs?

CLOs are issued and managed by asset managers. Of the approximately 175 CLO managers6 with post-crisis deals under management worldwide, PineBridge has found about two-thirds are in the US and the remaining third are in Europe.

Ownership of CLOs varies by tranche. The least risky, senior-most tranches are mainly owned by insurance companies (which favor income-producing investments) as well as banks (which need high-quality capital to meet regulatory requirements). The equity tranche is the riskiest, offers potential upside and a degree of control, and appeals to a wider universe of investors.


Many Types of Investors Own CLOs
Largest CLO owners by tranche type

Who Owns CLOs
Source: Morgan Stanley Research, Citi Research, Nomura as of 30 June 2019. *Permanent-capital vehicles are real estate investment trusts, business development companies, and funds.


How CLOs work

CLOs are complicated structures that combine multiple elements with the goal of generating an above-average return via income and capital appreciation. They consist of tranches that hold the underlying loans, which typically account for about 90% of total assets, and a sliver of equity. The tranches are ranked highest to lowest in order of credit quality, asset size, and income stream – and, thus, lowest to highest in order of riskiness.

Although leveraged loans themselves are rated below investment grade, most tranches are rated investment grade, benefiting from diversification, credit enhancements, and subordination of cash flows.

Each CLO has a defined lifecycle in which collateral is purchased, managed, redeemed, and returned to investors. The standard lifecycle includes five stages:

Warehousing (3-6 months): The manager purchases the initial collateral before the closing date.

Ramp-up (1-6 months): Following the closing date, the manager purchases the remaining collateral to complete the original portfolio. After the ramp-up is complete, the manager also performs monthly tests to ensure the portfolio’s ability to cover its interest and principal payments.

Reinvestment (1-5 years): Following the ramp-up period, the manager can reinvest all loan proceeds, either purchasing or selling bank loans to improve the portfolio’s credit quality.

Non-call (first 0.5 to 2 years of reinvestment): Loan-tranche holders earn a per-tranche yield spread specified at closing, after which the majority equity-tranche holder can call or refinance the loan tranches.

Repayment and deleveraging (1-4 years): As underlying loans are paid off, the manager pays down the loan tranches in order of seniority and distributes the remaining proceeds to the equity-tranche holders.


Tranches Allocate Assets, Income, and Risk
Typical CLO tranche structure

CLO Tranche Structure
Source: Citibank as of 30 September 2021.


All about the cash flows

Cash flows are the lifeblood of a CLO: They determine the distribution of income and principal, which determines the return on investment. The key concept is that distributions are paid sequentially starting with the senior-most tranche until each loan tranche has been paid its full distribution. Equity-tranche holders absorb costs and receive the residual distributions once the costs have been paid.

Coverage tests are a vital mechanism to detect and correct collateral deterioration, which directly affects the allocation of cash flows. All CLOs have covenants that require the manager to test the portfolio’s ability to cover its interest and principal payments monthly. Among the many such tests, the most common are the interest coverage7 and over-collateralization8 tests. Covenants specify baseline values for each test.

If the tests come up short, the manager must take cash flows from the lowest debt and equity-tranche holders and divert them to retire the loan tranches in order of seniority. The diagram below provides a general illustration of the “waterfall” process in which cash flows are paid when the portfolio passes and doesn’t pass its interest coverage tests.


The Cash Flow Waterfall Has Two Streams
Interest payments are based on the results of the coverage test

CLO Interest Payments
Source: Morgan Stanley Research, “A Primer on Global Collateralized Loan Obligations (CLOs),” as of 20 September 2021.


Built-in risk protections

Coverage tests are one of several risk protections built into the CLO structure. Others include:

Collateral concentration limits. Many deals mandate that at least 90% of the portfolio be invested in senior secured loans.

Borrower diversification. The pool of loans typically must be diversified across 150-450 distinct borrowers in 20-30 industries, with a small percentage of the assets (e.g., 2%) invested in the loans of any single borrower.

Borrower size requirements. Deals often restrict managers from purchasing loans to small companies, whose trading liquidity is low.

The equity tranche: the highest risk could mean the highest return

The equity tranche occupies a distinct place in the CLO structure. It’s essentially a highly leveraged play on the strength of the underlying collateral. Because the equity tranche’s success depends on the success of the loan tranches – it’s last in line to receive cash flows and first to realize loan losses – its owners take the most risk of any CLO investors. Their goal, then, is to maximize the value of the equity.

As compensation for providing the majority of equity capital, the majority equity-tranche holder is given potential control over the entire CLO in the form of options, as highlighted below:

Call option. The majority equity investor can direct a refinancing in some or all CLO debt after the non-call period expires to take advantage of potentially accretive opportunities for the equity returns, such as:

Refi scenario. CLO debt is refinanced into lower-cost debt with the same maturity and minimal changes to other deal terms.

Reset scenario. All CLO debt is refinanced, and the legal maturity of the debt is extended. Resets typically extend the reinvestment period of the CLO and the period during which the CLO equity can potentially capture value under volatile leveraged loan market conditions.

Both options could potentially increase prospective equity returns over the life of the CLO by roughly 50 to 150 bps.

Redemption occurs when the assets are sold, the proceeds are used to pay off the debt, and the residual amount is paid to the equity, resulting in a final internal rate of return (IRR) calculation. Redemption allows the majority equity holder to optimize the value of the underlying collateral by controlling the point in time that the loan assets are liquidated.

Keeping up with regulatory changes

In the wake of securitized investments’ difficulties during the financial crisis, US and European regulators took steps to mitigate CLOs’ structural risks and make CLOs more attractive for investors.

European regulation is concentrated in several rules governing the capital requirements for banks and insurance companies. Risk retention, commonly known as “skin in the game,” has been a requirement in Europe since 2010. It holds that CLO managers must retain 5% of the original value of the assets in their CLOs to align their interests more closely with those of investors. The US required CLOs to be risk-retention compliant from December 2016 to May 2018. A court case brought by the LSTA reversed the decision, as it was deemed that CLO managers do not “originate” the loans; rather, they buy them. As a result, risk retention is no longer required for US CLO issuers.

A prominent US regulatory development was the implementation of the Volcker Rule, which became effective in 2014. To be in compliance, most vintage 2.0 CLOs issued starting in 2014 are collateralized only with loans, and many 1.0 CLOs were “Volckerized” to eliminate non-loan collateral (where previously CLOs had 5%-10% exposure to bonds). While the Volcker rule has since been amended to allow high yield bonds, few CLOs include these investments, and exposure is generally limited to 5%-10% and compensated for by increased levels of subordination.

A wealth of potential benefits …

CLOs can offer investors multiple benefits, both on their own and versus other fixed income sectors.

Strong returns. Over the long term, CLO tranches have performed well relative to other corporate debt categories, including bank loans, high yield bonds, and investment grade bonds, and significantly outperformed at lower rating tiers.


US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
9.5-year annualized returns as of 30 June 2021. Sources: JP Morgan, Bloomberg, and S&P/LCD. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Wider yield spreads. CLO spreads typically are wider than those of other debt instruments, reflecting CLOs’ greater complexity, lower liquidity, and regulatory requirements. Compared with investment grade corporates, as well as other higher-yielding debt sectors – notably high yield and bank loans – CLO spreads are especially compelling.


CLO Spreads Are Compelling Versus Other Debt Sectors
CLO spreads versus comparably rated corporate bonds

CLO Spreads Are Compelling Versus Other Debt Sectors
Source: JP Morgan, Bloomberg, and S&P/LCD, as of 31 August 2021. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Low interest-rate sensitivity. Leveraged loans and their CLO tranches are floating-rate instruments, priced at a spread above a benchmark rate (such as Libor,9 Euribor, and SOFR). As interest rates rise or fall, CLO yields will move accordingly, and their prices have historically moved less than those of fixed-rate instruments. These characteristics can be advantageous to investors in diversified fixed income portfolios.

Attractive risk profile. As demonstrated by a variety of key metrics, with impairment rates the most notable example, CLOs have historically presented lower levels of principal loss when compared with corporate debt and other securitized products.


Low Cumulative Impairment Rates
CLO impairment and loss rates (1993-2019)

Low Cumulative Impairment Rates
“Impairment rate” is the terminology used by Moody’s for CLOs, which is most easily understood as the default rate for CLOs. A CLO has the ability to “cure” itself, and it is only upon final maturity that a tranche is recognized as “defaulted.” The “loss rate” is the eventual loss recognized on the tranche at maturity.

As of 22 January 2021. Source: Moody’s, Barclays Research. CLO impairment and loss given default (LGD) rates by original rating and based on 10-year cumulative data over 1993-2019. Impairments split by principal (outstanding principal write-down or loss >50bp of the original tranche balance or security carrying Ca or C rating, even if not yet experienced an interest shortfall or principal write-down) and interest (outstanding interest shortfall >50bp of original tranche balance).


A Competitive Risk/Return Profile
A Competitive Risk/Return Profile
Source: Bloomberg, JP Morgan, S&P LSTA, Barclays. 9.5-year annualized returns and volatility as of 30 June 2021.


Lower default rates. Of the approximately $500 billion of US CLOs issued from 1994-2009 and rated by S&P (vintage 1.0 CLOs), only 0.88% experienced defaults, and an even smaller percentage of those, 0.35%, were originally rated BBB or higher (see table below). If we consider those deals rated by Moody’s, there have been zero defaults on the AAA and AA CLO tranches across all vintages (1.0 through 3.0).10


Even Vintage 1.0 CLOs Experienced Minimal Defaults
Even Vintage 1.0 CLOs Experienced Minimal Defaults
Source: S&P Global Ratings as of 2 August 2018.


Diversification. CLO correlations versus other fixed income categories are relatively low, meaning that many CLOs have historically increased the effective diversification to a broader portfolio.

CLO Correlations to Other Fixed Income Asset Classes
CLO Correlations to Other Fixed Income Asset Classes
Source: JP Morgan, Bloomberg, 9.5-year correlations as of 30 June 2021. CLOs represented by the JP Morgan CLO Post-Crisis Index. US Treasury bonds represented by the Bloomberg Long Treasury Index. US aggregate represented by the Bloomberg US Aggregate Index. US IG credit represented by the Bloomberg US Credit Index. Securitized products represented by the Bloomberg US Securitized: MBS/ABS/CMBS and Covered TR Index. High yield represented by the Bloomberg US Corporate High Yield Index. EM debt represented by the JP Morgan EMBI Global Diversified Composite Index.


Inflation hedge. CLOs’ floating-rate yields make them an effective hedge against inflation.

Strong credit quality. Unlike most corporate bonds, leveraged loans are both secured and backed by first-lien collateral.

… and important risks to consider11

The complexity of CLOs comes with a number of risks that investors should consider carefully.

Credit strength. While CLOs enjoy strong credit quality due to the senior secured status of leveraged loans, it’s important to keep in mind that leveraged loans carry inherent credit risk: They’re issued to below-investment-grade companies whose revenue streams are sensitive to fluctuations in the economic cycle.

Collateral deterioration. If a CLO’s loans experience losses, cash flows are allocated to tranches in order of seniority. Depending on the severity of the losses, the value of the equity tranche could be wiped out and junior loan tranches could lose principal.

Non-recourse and not guaranteed. Leveraged loans are senior obligations and, as such, have full recourse to the borrower and its assets in the event of default. A CLO, however, has recourse only to the principal and interest payments of the loans in the portfolio.

Loan prepayments. Leveraged loan borrowers may choose to prepay their loans in pieces or completely. While experienced CLO managers may anticipate prepayments, they’re nonetheless unpredictable. The size, timing, and frequency of prepayments could potentially disrupt cash flows and challenge managers’ ability to maximize portfolio value.

Trading liquidity. CLOs generally enjoy healthy trading liquidity – but that could change very quickly if market conditions turn. A prime example is the financial crisis, when trading activity for even the most liquid debt instruments slowed to a trickle.

Timing of issuance. While market conditions could be strong when a CLO is issued, they might not be during its reinvestment period. That’s what happened to the 2003 vintages, whose reinvestment period coincided with the onset of the financial crisis and its resulting drop-off in trading volume.

Manager selection. Historical performance of CLO managers encompasses a wide spectrum of returns, underscoring the importance of choosing seasoned managers with solid long-term track records.

Spread duration. While interest rate duration is low due to the floating-rate nature of CLO tranches (indexed off three-month Libor,12 Euribor, or SOFR), spread duration is a consideration that should be taken into account. Due to a typical reinvestment period of four to five years, spread duration is usually between 3.5 and seven years. The higher up the capital stack, the lower the spread duration, as each CLO is redeemed sequentially, making the lower-rated tranches longer in spread duration.


Corporate Credit Asset Classes Versus CLO Tranches
Corporate Credit Asset Classes Versus CLO Tranches
As of 30 June 2021. Sources: S&P/LSTA Leveraged Loan Index; Bloomberg Indices; JP Morgan CEMBI Broad Diversified; JP Morgan CLOIE. *1-year speculative default rate. **10-year geometric mean for all CLO tranches. Sources: Bank of America Merrill Lynch High Yield Strategy Default Rates/ Issues 5 July 2017; Moody’s: Structured Finance: CLOs - Global Impairment and Loss Rates of US and European CLOs: 1993-2017, 25 June 2018. Past performance is not indicative of future results. There can be no assurance that the target will be achieved.

Note: Libor references above should be considered illustrative as this rate is effectively ceasing by the end of 2021. Please review “Risks Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more information regarding this transition.


Choosing the right manager

The most critical decision a CLO investor can make is the selection of a manager. It isn’t easy: There are approximately 175 managers13 with postcrisis CLOs to choose from, and each creates its own portfolios using its own investment style. And it’s worth repeating that historical performance among managers greatly varies. That said, successful managers tend to share several key traits.

Extensive experience

There’s no substitute for deep CLO management experience, which provides the combination of skills, practice, tactical and strategic savvy, adjustment-making, and chronological perspective needed to generate strong returns in such a complicated asset class.

Chronological perspective may be the most important aspect of experience in the CLO world, as the benefit of having managed portfolios before, during, and after the financial crisis is incalculable.

Excellence of execution

Managers should show strong abilities in the vital competencies that collectively define best-practice portfolio management. These begin with loan selection, as creating a strong collateral base lays the foundation for potential success. Trading skill enables the manager to know when to take gains, avoid losses, and adjust the portfolio as market conditions evolve. Effective management of deteriorating credits affects not just the specific credits involved, but also the entire CLO due to the way cash flows are distributed through the tranche structure. And the reinvestment of principal proceeds in new collateral can make the difference between good and great performance.

Expertise in handling risk

Sound risk management is both a cause and effect of these best practices: It informs everything the manager does and is reflected in the results. In addition to oversight of the portfolio, it includes skillful execution of coverage tests; the ability to understand the nuances and idiosyncrasies of CLO documentation, which is nonstandard and complex; and a talent for balancing the numerous portfolio metrics by optimizing as many as possible while taking a hit on as few as possible.

[Typical Lax Dad]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

Yeah if Citrix is a 10-15pt loss (more on the bonds the TL B was more like 91-93/100) so they had no choice but to hold.

I shared elsewhere $24mm of AA bonds fully tangibly secured by CSV + cash + 6mo integrate reserve and couldn't get done at S + 375, they printed at + 500 on 1yr bonds on zero loss historical assets. Given there’s no liquidity in the Lev Loan market and half the CLO asset managers are in or soon to be in default on their warehouse faculties at a minimum for violating seasoning test covenants (hardly technical one of the first reasons warehouses get shut down because they’re uneconomical for the lenders unless they get the co-mgr fee income from turn at sale of assets), what’s fair value? +600?, +800? 7yr term w minimal amortization (presume standard 1%/annum which is nothing in terms of deleveraging without increasing cash flow which ain’t happening for 2-3yrs given the turn of employees within the org).

If you do the math, add in a 1-2pt bid/ask in secondary market and apply back of the napkin spread deficiency of 300-400bps x 7yrs and a 1.5% mid market fair value liquidity premium, this deal could easily have been printed at or below 80% of par which is the standard definition of distressed vs “par” loan. (20-30pts spread discount plus bid/ask could be 30pts).

Been in cap markets bond mode lately. Former life do more strategic stuff usually now but that’s how fubarred things were this week. Elon couldve closer cleanly and more cheaply 3mo ago if he wasn’t doing “Jazz Elon” and was behaving like “intelligent Elon” all year.

Relative value speaking, this deal could trade at 72 to 80 for the senior secured tranche if the AA bonds you noted are an alternative. That’s kind of ridiculous.

[Typical Lax Dad]

Sort of what I thought: https://www.bloomberg.com/news/articles ... reet-banks


A different group of banks realized roughly $600 million in losses for the buyout of Citrix Systems Inc. in September and were forced to hold roughly $6.5 billion of the debt. Lenders supporting the buyout of Nielsen Holdings Plc. were stuck with more than $8 billion of debt.

Because the CLO managers can’t clear their warehouse by issuing. The banks have become distributors of debt more than holders in the last 20yrs as you know. But as mentioned as the CLO managers have full warehouses they can’t buy. Half are going out of business. The tier 2 and 3 guys are in trouble, trouble, trouble.

Talked to a guy at Comvest today who I’ve got a deal from and he said he’s got 17 spec fin deals in the pipeline and more showing up every day (“yours isn’t at the bottom but I’ve got a couple in front of you”)

LSTA 100 syndicated loan index:

https://www.lsta.org/content/daily-pric ... 1666995109

Primer from tier 3 manager who’s taking their book

What is a CLO?

Put simply, a CLO is a portfolio of predominantly leveraged loans that is securitized and managed as a fund. The assets are typically senior secured loans, which benefit from priority of payment over other claimants in the event of an insolvency. Each CLO is structured as a series of tranches that are interest-paying bonds, along with a small portion of equity.

CLOs originated in the late 1980s, similar to other types of securitizations, as a way for banks to package leveraged loans together to provide investors with an investment vehicle with varied degrees of risk and return to best suit their investment objectives. The first vintage of “modern” CLOs – which focused on generating income via cash flows – was issued starting in the mid- to late-1990s. Commonly known as “CLO 1.0,” this vintage included some high yield bonds, as well as loans, and were the standard CLO structure until the financial crisis struck in 2008.

The next vintage, CLO 2.0, began in 2010 and changed in response to the financial crisis by strengthening credit support and shortening the period in which loan interest and proceeds could be reinvested into additional loans.

The current vintage, CLO 3.0, began in 2014 and aimed to further reduce risk by eliminating high yield bonds and adhering to the Volcker Rule and other new regulations. In 2020, the Volcker Rule was further amended, and high yield bonds are now allowed back into CLOs. Currently, few CLOs allow for investments into high yield, and those that do generally limit the exposure to 5%-10%. To compensate for the exposure to high yield, these CLOs have increased levels of subordination to better protect debt tranches. Vintages 2.0 and 3.0 represent the biggest chunk of the market, with about $800 billion in principal outstanding, while less than 1% of the market remains in CLO 1.0 vintages.1

The vast majority of CLOs are called “arbitrage CLOs” because they aim to capture the excess spread between the portfolio of leveraged bank loans (assets) and the classes of CLO debt (liabilities), with the equity investors receiving any excess cash flows after the debt investors are paid in full. The market for arbitrage CLOs is valued at $959 billion globally, with about 83% issued in the US and 17% in Europe.2


CLOs Get Better With Age
US CLO vintages 2.0 and 3.0 represent the biggest share of the market today

US CLOs Outstanding
Source: BofA Merrill Lynch Global Research. As of 30 June 2021.


Leveraged loans: more than just collateral

Leveraged loans are more than simply the underlying collateral for CLOs: They’re the fuel that powers CLOs’ attractive income streams and the first of several levels of potential risk mitigation built into the CLO structure.

Standard & Poor’s defines leveraged loans as senior secured bank loans rated BB+ or lower (i.e., below investment grade) or yielding at least 125 basis points above a benchmark interest rate (typically Libor3 or SOFR in the US and Euribor in Europe) and secured by a first or second lien.4 Several characteristics make leveraged loans particularly suitable for securitizations. They:

Pay interest on a consistent monthly or quarterly basis;

Trade in a highly liquid secondary market;

Have a historically high recovery rate in the event of default; and

Originate from a large, diversified group of issuers.

As of 30 June 2021, the amount of leveraged bank loans outstanding was $1.26 trillion in the US and €252 billion in Europe.5

Who issues, manages, and owns CLOs?

CLOs are issued and managed by asset managers. Of the approximately 175 CLO managers6 with post-crisis deals under management worldwide, PineBridge has found about two-thirds are in the US and the remaining third are in Europe.

Ownership of CLOs varies by tranche. The least risky, senior-most tranches are mainly owned by insurance companies (which favor income-producing investments) as well as banks (which need high-quality capital to meet regulatory requirements). The equity tranche is the riskiest, offers potential upside and a degree of control, and appeals to a wider universe of investors.


Many Types of Investors Own CLOs
Largest CLO owners by tranche type

Who Owns CLOs
Source: Morgan Stanley Research, Citi Research, Nomura as of 30 June 2019. *Permanent-capital vehicles are real estate investment trusts, business development companies, and funds.


How CLOs work

CLOs are complicated structures that combine multiple elements with the goal of generating an above-average return via income and capital appreciation. They consist of tranches that hold the underlying loans, which typically account for about 90% of total assets, and a sliver of equity. The tranches are ranked highest to lowest in order of credit quality, asset size, and income stream – and, thus, lowest to highest in order of riskiness.

Although leveraged loans themselves are rated below investment grade, most tranches are rated investment grade, benefiting from diversification, credit enhancements, and subordination of cash flows.

Each CLO has a defined lifecycle in which collateral is purchased, managed, redeemed, and returned to investors. The standard lifecycle includes five stages:

Warehousing (3-6 months): The manager purchases the initial collateral before the closing date.

Ramp-up (1-6 months): Following the closing date, the manager purchases the remaining collateral to complete the original portfolio. After the ramp-up is complete, the manager also performs monthly tests to ensure the portfolio’s ability to cover its interest and principal payments.

Reinvestment (1-5 years): Following the ramp-up period, the manager can reinvest all loan proceeds, either purchasing or selling bank loans to improve the portfolio’s credit quality.

Non-call (first 0.5 to 2 years of reinvestment): Loan-tranche holders earn a per-tranche yield spread specified at closing, after which the majority equity-tranche holder can call or refinance the loan tranches.

Repayment and deleveraging (1-4 years): As underlying loans are paid off, the manager pays down the loan tranches in order of seniority and distributes the remaining proceeds to the equity-tranche holders.


Tranches Allocate Assets, Income, and Risk
Typical CLO tranche structure

CLO Tranche Structure
Source: Citibank as of 30 September 2021.


All about the cash flows

Cash flows are the lifeblood of a CLO: They determine the distribution of income and principal, which determines the return on investment. The key concept is that distributions are paid sequentially starting with the senior-most tranche until each loan tranche has been paid its full distribution. Equity-tranche holders absorb costs and receive the residual distributions once the costs have been paid.

Coverage tests are a vital mechanism to detect and correct collateral deterioration, which directly affects the allocation of cash flows. All CLOs have covenants that require the manager to test the portfolio’s ability to cover its interest and principal payments monthly. Among the many such tests, the most common are the interest coverage7 and over-collateralization8 tests. Covenants specify baseline values for each test.

If the tests come up short, the manager must take cash flows from the lowest debt and equity-tranche holders and divert them to retire the loan tranches in order of seniority. The diagram below provides a general illustration of the “waterfall” process in which cash flows are paid when the portfolio passes and doesn’t pass its interest coverage tests.


The Cash Flow Waterfall Has Two Streams
Interest payments are based on the results of the coverage test

CLO Interest Payments
Source: Morgan Stanley Research, “A Primer on Global Collateralized Loan Obligations (CLOs),” as of 20 September 2021.


Built-in risk protections

Coverage tests are one of several risk protections built into the CLO structure. Others include:

Collateral concentration limits. Many deals mandate that at least 90% of the portfolio be invested in senior secured loans.

Borrower diversification. The pool of loans typically must be diversified across 150-450 distinct borrowers in 20-30 industries, with a small percentage of the assets (e.g., 2%) invested in the loans of any single borrower.

Borrower size requirements. Deals often restrict managers from purchasing loans to small companies, whose trading liquidity is low.

The equity tranche: the highest risk could mean the highest return

The equity tranche occupies a distinct place in the CLO structure. It’s essentially a highly leveraged play on the strength of the underlying collateral. Because the equity tranche’s success depends on the success of the loan tranches – it’s last in line to receive cash flows and first to realize loan losses – its owners take the most risk of any CLO investors. Their goal, then, is to maximize the value of the equity.

As compensation for providing the majority of equity capital, the majority equity-tranche holder is given potential control over the entire CLO in the form of options, as highlighted below:

Call option. The majority equity investor can direct a refinancing in some or all CLO debt after the non-call period expires to take advantage of potentially accretive opportunities for the equity returns, such as:

Refi scenario. CLO debt is refinanced into lower-cost debt with the same maturity and minimal changes to other deal terms.

Reset scenario. All CLO debt is refinanced, and the legal maturity of the debt is extended. Resets typically extend the reinvestment period of the CLO and the period during which the CLO equity can potentially capture value under volatile leveraged loan market conditions.

Both options could potentially increase prospective equity returns over the life of the CLO by roughly 50 to 150 bps.

Redemption occurs when the assets are sold, the proceeds are used to pay off the debt, and the residual amount is paid to the equity, resulting in a final internal rate of return (IRR) calculation. Redemption allows the majority equity holder to optimize the value of the underlying collateral by controlling the point in time that the loan assets are liquidated.

Keeping up with regulatory changes

In the wake of securitized investments’ difficulties during the financial crisis, US and European regulators took steps to mitigate CLOs’ structural risks and make CLOs more attractive for investors.

European regulation is concentrated in several rules governing the capital requirements for banks and insurance companies. Risk retention, commonly known as “skin in the game,” has been a requirement in Europe since 2010. It holds that CLO managers must retain 5% of the original value of the assets in their CLOs to align their interests more closely with those of investors. The US required CLOs to be risk-retention compliant from December 2016 to May 2018. A court case brought by the LSTA reversed the decision, as it was deemed that CLO managers do not “originate” the loans; rather, they buy them. As a result, risk retention is no longer required for US CLO issuers.

A prominent US regulatory development was the implementation of the Volcker Rule, which became effective in 2014. To be in compliance, most vintage 2.0 CLOs issued starting in 2014 are collateralized only with loans, and many 1.0 CLOs were “Volckerized” to eliminate non-loan collateral (where previously CLOs had 5%-10% exposure to bonds). While the Volcker rule has since been amended to allow high yield bonds, few CLOs include these investments, and exposure is generally limited to 5%-10% and compensated for by increased levels of subordination.

A wealth of potential benefits …

CLOs can offer investors multiple benefits, both on their own and versus other fixed income sectors.

Strong returns. Over the long term, CLO tranches have performed well relative to other corporate debt categories, including bank loans, high yield bonds, and investment grade bonds, and significantly outperformed at lower rating tiers.


US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
9.5-year annualized returns as of 30 June 2021. Sources: JP Morgan, Bloomberg, and S&P/LCD. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Wider yield spreads. CLO spreads typically are wider than those of other debt instruments, reflecting CLOs’ greater complexity, lower liquidity, and regulatory requirements. Compared with investment grade corporates, as well as other higher-yielding debt sectors – notably high yield and bank loans – CLO spreads are especially compelling.


CLO Spreads Are Compelling Versus Other Debt Sectors
CLO spreads versus comparably rated corporate bonds

CLO Spreads Are Compelling Versus Other Debt Sectors
Source: JP Morgan, Bloomberg, and S&P/LCD, as of 31 August 2021. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Low interest-rate sensitivity. Leveraged loans and their CLO tranches are floating-rate instruments, priced at a spread above a benchmark rate (such as Libor,9 Euribor, and SOFR). As interest rates rise or fall, CLO yields will move accordingly, and their prices have historically moved less than those of fixed-rate instruments. These characteristics can be advantageous to investors in diversified fixed income portfolios.

Attractive risk profile. As demonstrated by a variety of key metrics, with impairment rates the most notable example, CLOs have historically presented lower levels of principal loss when compared with corporate debt and other securitized products.


Low Cumulative Impairment Rates
CLO impairment and loss rates (1993-2019)

Low Cumulative Impairment Rates
“Impairment rate” is the terminology used by Moody’s for CLOs, which is most easily understood as the default rate for CLOs. A CLO has the ability to “cure” itself, and it is only upon final maturity that a tranche is recognized as “defaulted.” The “loss rate” is the eventual loss recognized on the tranche at maturity.

As of 22 January 2021. Source: Moody’s, Barclays Research. CLO impairment and loss given default (LGD) rates by original rating and based on 10-year cumulative data over 1993-2019. Impairments split by principal (outstanding principal write-down or loss >50bp of the original tranche balance or security carrying Ca or C rating, even if not yet experienced an interest shortfall or principal write-down) and interest (outstanding interest shortfall >50bp of original tranche balance).


A Competitive Risk/Return Profile
A Competitive Risk/Return Profile
Source: Bloomberg, JP Morgan, S&P LSTA, Barclays. 9.5-year annualized returns and volatility as of 30 June 2021.


Lower default rates. Of the approximately $500 billion of US CLOs issued from 1994-2009 and rated by S&P (vintage 1.0 CLOs), only 0.88% experienced defaults, and an even smaller percentage of those, 0.35%, were originally rated BBB or higher (see table below). If we consider those deals rated by Moody’s, there have been zero defaults on the AAA and AA CLO tranches across all vintages (1.0 through 3.0).10


Even Vintage 1.0 CLOs Experienced Minimal Defaults
Even Vintage 1.0 CLOs Experienced Minimal Defaults
Source: S&P Global Ratings as of 2 August 2018.


Diversification. CLO correlations versus other fixed income categories are relatively low, meaning that many CLOs have historically increased the effective diversification to a broader portfolio.

CLO Correlations to Other Fixed Income Asset Classes
CLO Correlations to Other Fixed Income Asset Classes
Source: JP Morgan, Bloomberg, 9.5-year correlations as of 30 June 2021. CLOs represented by the JP Morgan CLO Post-Crisis Index. US Treasury bonds represented by the Bloomberg Long Treasury Index. US aggregate represented by the Bloomberg US Aggregate Index. US IG credit represented by the Bloomberg US Credit Index. Securitized products represented by the Bloomberg US Securitized: MBS/ABS/CMBS and Covered TR Index. High yield represented by the Bloomberg US Corporate High Yield Index. EM debt represented by the JP Morgan EMBI Global Diversified Composite Index.


Inflation hedge. CLOs’ floating-rate yields make them an effective hedge against inflation.

Strong credit quality. Unlike most corporate bonds, leveraged loans are both secured and backed by first-lien collateral.

… and important risks to consider11

The complexity of CLOs comes with a number of risks that investors should consider carefully.

Credit strength. While CLOs enjoy strong credit quality due to the senior secured status of leveraged loans, it’s important to keep in mind that leveraged loans carry inherent credit risk: They’re issued to below-investment-grade companies whose revenue streams are sensitive to fluctuations in the economic cycle.

Collateral deterioration. If a CLO’s loans experience losses, cash flows are allocated to tranches in order of seniority. Depending on the severity of the losses, the value of the equity tranche could be wiped out and junior loan tranches could lose principal.

Non-recourse and not guaranteed. Leveraged loans are senior obligations and, as such, have full recourse to the borrower and its assets in the event of default. A CLO, however, has recourse only to the principal and interest payments of the loans in the portfolio.

Loan prepayments. Leveraged loan borrowers may choose to prepay their loans in pieces or completely. While experienced CLO managers may anticipate prepayments, they’re nonetheless unpredictable. The size, timing, and frequency of prepayments could potentially disrupt cash flows and challenge managers’ ability to maximize portfolio value.

Trading liquidity. CLOs generally enjoy healthy trading liquidity – but that could change very quickly if market conditions turn. A prime example is the financial crisis, when trading activity for even the most liquid debt instruments slowed to a trickle.

Timing of issuance. While market conditions could be strong when a CLO is issued, they might not be during its reinvestment period. That’s what happened to the 2003 vintages, whose reinvestment period coincided with the onset of the financial crisis and its resulting drop-off in trading volume.

Manager selection. Historical performance of CLO managers encompasses a wide spectrum of returns, underscoring the importance of choosing seasoned managers with solid long-term track records.

Spread duration. While interest rate duration is low due to the floating-rate nature of CLO tranches (indexed off three-month Libor,12 Euribor, or SOFR), spread duration is a consideration that should be taken into account. Due to a typical reinvestment period of four to five years, spread duration is usually between 3.5 and seven years. The higher up the capital stack, the lower the spread duration, as each CLO is redeemed sequentially, making the lower-rated tranches longer in spread duration.


Corporate Credit Asset Classes Versus CLO Tranches
Corporate Credit Asset Classes Versus CLO Tranches
As of 30 June 2021. Sources: S&P/LSTA Leveraged Loan Index; Bloomberg Indices; JP Morgan CEMBI Broad Diversified; JP Morgan CLOIE. *1-year speculative default rate. **10-year geometric mean for all CLO tranches. Sources: Bank of America Merrill Lynch High Yield Strategy Default Rates/ Issues 5 July 2017; Moody’s: Structured Finance: CLOs - Global Impairment and Loss Rates of US and European CLOs: 1993-2017, 25 June 2018. Past performance is not indicative of future results. There can be no assurance that the target will be achieved.

Note: Libor references above should be considered illustrative as this rate is effectively ceasing by the end of 2021. Please review “Risks Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more information regarding this transition.


Choosing the right manager

The most critical decision a CLO investor can make is the selection of a manager. It isn’t easy: There are approximately 175 managers13 with postcrisis CLOs to choose from, and each creates its own portfolios using its own investment style. And it’s worth repeating that historical performance among managers greatly varies. That said, successful managers tend to share several key traits.

Extensive experience

There’s no substitute for deep CLO management experience, which provides the combination of skills, practice, tactical and strategic savvy, adjustment-making, and chronological perspective needed to generate strong returns in such a complicated asset class.

Chronological perspective may be the most important aspect of experience in the CLO world, as the benefit of having managed portfolios before, during, and after the financial crisis is incalculable.

Excellence of execution

Managers should show strong abilities in the vital competencies that collectively define best-practice portfolio management. These begin with loan selection, as creating a strong collateral base lays the foundation for potential success. Trading skill enables the manager to know when to take gains, avoid losses, and adjust the portfolio as market conditions evolve. Effective management of deteriorating credits affects not just the specific credits involved, but also the entire CLO due to the way cash flows are distributed through the tranche structure. And the reinvestment of principal proceeds in new collateral can make the difference between good and great performance.

Expertise in handling risk

Sound risk management is both a cause and effect of these best practices: It informs everything the manager does and is reflected in the results. In addition to oversight of the portfolio, it includes skillful execution of coverage tests; the ability to understand the nuances and idiosyncrasies of CLO documentation, which is nonstandard and complex; and a talent for balancing the numerous portfolio metrics by optimizing as many as possible while taking a hit on as few as possible.

I was a young guy and got in an argument with an old tight ass on my desk when I told him that CLO ratings were bogus because I didn’t believe that over collateralization meant a higher credit quality. Adding more CCC paper isn’t going to result in higher quality…..you just have more crap. The market has changed since then but these were the early Fitch CLO days.

[Farfromgeneva]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

Yeah if Citrix is a 10-15pt loss (more on the bonds the TL B was more like 91-93/100) so they had no choice but to hold.

I shared elsewhere $24mm of AA bonds fully tangibly secured by CSV + cash + 6mo integrate reserve and couldn't get done at S + 375, they printed at + 500 on 1yr bonds on zero loss historical assets. Given there’s no liquidity in the Lev Loan market and half the CLO asset managers are in or soon to be in default on their warehouse faculties at a minimum for violating seasoning test covenants (hardly technical one of the first reasons warehouses get shut down because they’re uneconomical for the lenders unless they get the co-mgr fee income from turn at sale of assets), what’s fair value? +600?, +800? 7yr term w minimal amortization (presume standard 1%/annum which is nothing in terms of deleveraging without increasing cash flow which ain’t happening for 2-3yrs given the turn of employees within the org).

If you do the math, add in a 1-2pt bid/ask in secondary market and apply back of the napkin spread deficiency of 300-400bps x 7yrs and a 1.5% mid market fair value liquidity premium, this deal could easily have been printed at or below 80% of par which is the standard definition of distressed vs “par” loan. (20-30pts spread discount plus bid/ask could be 30pts).

Been in cap markets bond mode lately. Former life do more strategic stuff usually now but that’s how fubarred things were this week. Elon couldve closer cleanly and more cheaply 3mo ago if he wasn’t doing “Jazz Elon” and was behaving like “intelligent Elon” all year.

Relative value speaking, this deal could trade at 72 to 80 for the senior secured tranche if the AA bonds you noted are an alternative. That’s kind of ridiculous.

Printed yesterday.

Press Release
DBRS Morningstar Assigns Provisional Ratings to Gracie Point International Funding 2022-3

Other








October 20, 2022
DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes (the Notes) to be issued by Gracie Point International Funding 2022-3 (the Issuer):

-- $162,182,000 Class A Notes at AA (sf)
-- $28,330,000 Class B Notes at AA (low) (sf)
-- $8,519,000 Class C Notes at A (low) (sf)
-- $4,208,000 Class D Notes at BBB (low) (sf)

The provisional ratings are based on DBRS Morningstar’s review of the following analytical considerations:

-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: September 2022 Update,” published on September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

-- While the ongoing coronavirus pandemic has had an adverse effect on the U.S. borrower in general, DBRS Morningstar expects the performance of the underlying loans in the transaction to remain resilient because the life insurance premium loans are fully collateralized by the cash surrender value from highly rated life insurance companies and other acceptable collateral that is mostly either cash or letters of credit from highly rated banking institutions. Therefore, the payment sources for the Notes will be either the life insurance companies or cash held at a trust account or at an Eligible Account Bank/Eligible Account Firm. DBRS Morningstar does not expect the economic stress caused by the pandemic to adversely affect an insurance company's ability to pay in the short to medium term.

-- Excess spread, a fully funded Reserve Account, and subordination provide credit enhancement levels that are commensurate with the ratings of the Offered Notes. Credit enhancement levels are sufficient to support DBRS Morningstar-projected expected cumulative loss assumptions under various stress scenarios.

-- DBRS Morningstar deems Gracie Point, LLC (Gracie Point) an acceptable originator and servicer of life insurance premium finance receivables. However, Gracie Point has incurred operating losses and may continue to incur net losses as it grows its business. If Gracie Point is unable to fulfill its duties because of an Administrative Agent Replacement Event or a Servicer Default, repayment of the Notes would rely on the ability of Vervent Inc. (Vervent), as the Backup Administrative Agent and Backup Servicer, to fulfill the duties of Administrative Agent and Servicer under the Transaction Documents. DBRS Morningstar deems Vervent as an acceptable backup administrator and backup servicer.

-- The payment sources of the loans underlying the Participations are life insurance companies that issue the pledged life insurance policy contracts securing the loans. A potential insolvency of such life insurance company can adversely impact the collectability of the cash surrender value or death benefits payable by the life insurance company. The transaction limits that only Eligible Life Insurance Companies may issue life insurance policies to be included in the collateral securing the underlying loans. A portion of the underlying collateral can be cash collateral that is held at depository institutions, and the transaction requires them to be either an Eligible Account Bank or Eligible Account Firm with minimum required ratings.

-- The collateral pool at closing is expected to consist of 31 life insurance companies, with the top five insurance companies representing approximately 49.46% of the collateral pool. To account for potential losses from exposure to the largest insurance companies in the collateral pool, DBRS Morningstar simulated the default of the five largest insurance companies with rating equivalents lower than the targeted rating for a tranche.

-- During the Replacement Period, the Issuer may purchase additional Participations using cash surrender proceeds from defaulted loans or proceeds from prepaid loans or retained collections. Therefore, the credit quality of the underlying loans could change during the Replacement Period. The transaction, however, only allows a new Participation in a loan that meets the Replacement Criteria to maintain a similar collateral pool mix as the closing pool and ensure the related life insurance company or depository institution of the replacement loan are highly rated.

-- The transaction is exposed to basis risk that will stem from the mismatch in the rate benchmark between the loans and the Notes until April 1, 2023. After April 1, 2023, the transaction will be exposed to the basis risk due to the underlying floating-rate benchmark for the loans being 90-Day Average Secured Overnight Financing Rate (SOFR) and the Note rate being 30-Day Average SOFR.

-- Gracie Point was established in 2010 and issued its first loan in June 2013, so the Company does not have significant historical performance data of the loans originated through its platform. Each underlying loan in the collateral pool, however, is fully collateralized by a minimum cash surrender value, a letter of credit, and/or cash collateral, which, coupled with the highly rated insurance companies and depository institutions, partially mitigate uncertainty regarding the underlying loans' future performance.

-- All of the life insurance premium loans have longer maturity dates than the Scheduled Maturity Date of the Notes. Therefore, if the Issuer is not able to refinance or liquidate its Participations, it may not be able to repay such Notes on the Scheduled Maturity Date. Under each Designated Finance Loan Agreement, however, the Finance Lender will have the right to call a loan as fully due and payable upon the occurrence of a Maturity Acceleration Event, which will ensure ultimate payments of principal to the Notes by the Scheduled Maturity Date.

[Farfromgeneva]

Sort of what I thought: https://www.bloomberg.com/news/articles ... reet-banks


A different group of banks realized roughly $600 million in losses for the buyout of Citrix Systems Inc. in September and were forced to hold roughly $6.5 billion of the debt. Lenders supporting the buyout of Nielsen Holdings Plc. were stuck with more than $8 billion of debt.

Because the CLO managers can’t clear their warehouse by issuing. The banks have become distributors of debt more than holders in the last 20yrs as you know. But as mentioned as the CLO managers have full warehouses they can’t buy. Half are going out of business. The tier 2 and 3 guys are in trouble, trouble, trouble.

Talked to a guy at Comvest today who I’ve got a deal from and he said he’s got 17 spec fin deals in the pipeline and more showing up every day (“yours isn’t at the bottom but I’ve got a couple in front of you”)

LSTA 100 syndicated loan index:

https://www.lsta.org/content/daily-pric ... 1666995109

Primer from tier 3 manager who’s taking their book

What is a CLO?

Put simply, a CLO is a portfolio of predominantly leveraged loans that is securitized and managed as a fund. The assets are typically senior secured loans, which benefit from priority of payment over other claimants in the event of an insolvency. Each CLO is structured as a series of tranches that are interest-paying bonds, along with a small portion of equity.

CLOs originated in the late 1980s, similar to other types of securitizations, as a way for banks to package leveraged loans together to provide investors with an investment vehicle with varied degrees of risk and return to best suit their investment objectives. The first vintage of “modern” CLOs – which focused on generating income via cash flows – was issued starting in the mid- to late-1990s. Commonly known as “CLO 1.0,” this vintage included some high yield bonds, as well as loans, and were the standard CLO structure until the financial crisis struck in 2008.

The next vintage, CLO 2.0, began in 2010 and changed in response to the financial crisis by strengthening credit support and shortening the period in which loan interest and proceeds could be reinvested into additional loans.

The current vintage, CLO 3.0, began in 2014 and aimed to further reduce risk by eliminating high yield bonds and adhering to the Volcker Rule and other new regulations. In 2020, the Volcker Rule was further amended, and high yield bonds are now allowed back into CLOs. Currently, few CLOs allow for investments into high yield, and those that do generally limit the exposure to 5%-10%. To compensate for the exposure to high yield, these CLOs have increased levels of subordination to better protect debt tranches. Vintages 2.0 and 3.0 represent the biggest chunk of the market, with about $800 billion in principal outstanding, while less than 1% of the market remains in CLO 1.0 vintages.1

The vast majority of CLOs are called “arbitrage CLOs” because they aim to capture the excess spread between the portfolio of leveraged bank loans (assets) and the classes of CLO debt (liabilities), with the equity investors receiving any excess cash flows after the debt investors are paid in full. The market for arbitrage CLOs is valued at $959 billion globally, with about 83% issued in the US and 17% in Europe.2


CLOs Get Better With Age
US CLO vintages 2.0 and 3.0 represent the biggest share of the market today

US CLOs Outstanding
Source: BofA Merrill Lynch Global Research. As of 30 June 2021.


Leveraged loans: more than just collateral

Leveraged loans are more than simply the underlying collateral for CLOs: They’re the fuel that powers CLOs’ attractive income streams and the first of several levels of potential risk mitigation built into the CLO structure.

Standard & Poor’s defines leveraged loans as senior secured bank loans rated BB+ or lower (i.e., below investment grade) or yielding at least 125 basis points above a benchmark interest rate (typically Libor3 or SOFR in the US and Euribor in Europe) and secured by a first or second lien.4 Several characteristics make leveraged loans particularly suitable for securitizations. They:

Pay interest on a consistent monthly or quarterly basis;

Trade in a highly liquid secondary market;

Have a historically high recovery rate in the event of default; and

Originate from a large, diversified group of issuers.

As of 30 June 2021, the amount of leveraged bank loans outstanding was $1.26 trillion in the US and €252 billion in Europe.5

Who issues, manages, and owns CLOs?

CLOs are issued and managed by asset managers. Of the approximately 175 CLO managers6 with post-crisis deals under management worldwide, PineBridge has found about two-thirds are in the US and the remaining third are in Europe.

Ownership of CLOs varies by tranche. The least risky, senior-most tranches are mainly owned by insurance companies (which favor income-producing investments) as well as banks (which need high-quality capital to meet regulatory requirements). The equity tranche is the riskiest, offers potential upside and a degree of control, and appeals to a wider universe of investors.


Many Types of Investors Own CLOs
Largest CLO owners by tranche type

Who Owns CLOs
Source: Morgan Stanley Research, Citi Research, Nomura as of 30 June 2019. *Permanent-capital vehicles are real estate investment trusts, business development companies, and funds.


How CLOs work

CLOs are complicated structures that combine multiple elements with the goal of generating an above-average return via income and capital appreciation. They consist of tranches that hold the underlying loans, which typically account for about 90% of total assets, and a sliver of equity. The tranches are ranked highest to lowest in order of credit quality, asset size, and income stream – and, thus, lowest to highest in order of riskiness.

Although leveraged loans themselves are rated below investment grade, most tranches are rated investment grade, benefiting from diversification, credit enhancements, and subordination of cash flows.

Each CLO has a defined lifecycle in which collateral is purchased, managed, redeemed, and returned to investors. The standard lifecycle includes five stages:

Warehousing (3-6 months): The manager purchases the initial collateral before the closing date.

Ramp-up (1-6 months): Following the closing date, the manager purchases the remaining collateral to complete the original portfolio. After the ramp-up is complete, the manager also performs monthly tests to ensure the portfolio’s ability to cover its interest and principal payments.

Reinvestment (1-5 years): Following the ramp-up period, the manager can reinvest all loan proceeds, either purchasing or selling bank loans to improve the portfolio’s credit quality.

Non-call (first 0.5 to 2 years of reinvestment): Loan-tranche holders earn a per-tranche yield spread specified at closing, after which the majority equity-tranche holder can call or refinance the loan tranches.

Repayment and deleveraging (1-4 years): As underlying loans are paid off, the manager pays down the loan tranches in order of seniority and distributes the remaining proceeds to the equity-tranche holders.


Tranches Allocate Assets, Income, and Risk
Typical CLO tranche structure

CLO Tranche Structure
Source: Citibank as of 30 September 2021.


All about the cash flows

Cash flows are the lifeblood of a CLO: They determine the distribution of income and principal, which determines the return on investment. The key concept is that distributions are paid sequentially starting with the senior-most tranche until each loan tranche has been paid its full distribution. Equity-tranche holders absorb costs and receive the residual distributions once the costs have been paid.

Coverage tests are a vital mechanism to detect and correct collateral deterioration, which directly affects the allocation of cash flows. All CLOs have covenants that require the manager to test the portfolio’s ability to cover its interest and principal payments monthly. Among the many such tests, the most common are the interest coverage7 and over-collateralization8 tests. Covenants specify baseline values for each test.

If the tests come up short, the manager must take cash flows from the lowest debt and equity-tranche holders and divert them to retire the loan tranches in order of seniority. The diagram below provides a general illustration of the “waterfall” process in which cash flows are paid when the portfolio passes and doesn’t pass its interest coverage tests.


The Cash Flow Waterfall Has Two Streams
Interest payments are based on the results of the coverage test

CLO Interest Payments
Source: Morgan Stanley Research, “A Primer on Global Collateralized Loan Obligations (CLOs),” as of 20 September 2021.


Built-in risk protections

Coverage tests are one of several risk protections built into the CLO structure. Others include:

Collateral concentration limits. Many deals mandate that at least 90% of the portfolio be invested in senior secured loans.

Borrower diversification. The pool of loans typically must be diversified across 150-450 distinct borrowers in 20-30 industries, with a small percentage of the assets (e.g., 2%) invested in the loans of any single borrower.

Borrower size requirements. Deals often restrict managers from purchasing loans to small companies, whose trading liquidity is low.

The equity tranche: the highest risk could mean the highest return

The equity tranche occupies a distinct place in the CLO structure. It’s essentially a highly leveraged play on the strength of the underlying collateral. Because the equity tranche’s success depends on the success of the loan tranches – it’s last in line to receive cash flows and first to realize loan losses – its owners take the most risk of any CLO investors. Their goal, then, is to maximize the value of the equity.

As compensation for providing the majority of equity capital, the majority equity-tranche holder is given potential control over the entire CLO in the form of options, as highlighted below:

Call option. The majority equity investor can direct a refinancing in some or all CLO debt after the non-call period expires to take advantage of potentially accretive opportunities for the equity returns, such as:

Refi scenario. CLO debt is refinanced into lower-cost debt with the same maturity and minimal changes to other deal terms.

Reset scenario. All CLO debt is refinanced, and the legal maturity of the debt is extended. Resets typically extend the reinvestment period of the CLO and the period during which the CLO equity can potentially capture value under volatile leveraged loan market conditions.

Both options could potentially increase prospective equity returns over the life of the CLO by roughly 50 to 150 bps.

Redemption occurs when the assets are sold, the proceeds are used to pay off the debt, and the residual amount is paid to the equity, resulting in a final internal rate of return (IRR) calculation. Redemption allows the majority equity holder to optimize the value of the underlying collateral by controlling the point in time that the loan assets are liquidated.

Keeping up with regulatory changes

In the wake of securitized investments’ difficulties during the financial crisis, US and European regulators took steps to mitigate CLOs’ structural risks and make CLOs more attractive for investors.

European regulation is concentrated in several rules governing the capital requirements for banks and insurance companies. Risk retention, commonly known as “skin in the game,” has been a requirement in Europe since 2010. It holds that CLO managers must retain 5% of the original value of the assets in their CLOs to align their interests more closely with those of investors. The US required CLOs to be risk-retention compliant from December 2016 to May 2018. A court case brought by the LSTA reversed the decision, as it was deemed that CLO managers do not “originate” the loans; rather, they buy them. As a result, risk retention is no longer required for US CLO issuers.

A prominent US regulatory development was the implementation of the Volcker Rule, which became effective in 2014. To be in compliance, most vintage 2.0 CLOs issued starting in 2014 are collateralized only with loans, and many 1.0 CLOs were “Volckerized” to eliminate non-loan collateral (where previously CLOs had 5%-10% exposure to bonds). While the Volcker rule has since been amended to allow high yield bonds, few CLOs include these investments, and exposure is generally limited to 5%-10% and compensated for by increased levels of subordination.

A wealth of potential benefits …

CLOs can offer investors multiple benefits, both on their own and versus other fixed income sectors.

Strong returns. Over the long term, CLO tranches have performed well relative to other corporate debt categories, including bank loans, high yield bonds, and investment grade bonds, and significantly outperformed at lower rating tiers.


US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
US CLO Returns Versus IG Credit, High Yield, and Leveraged Loans
9.5-year annualized returns as of 30 June 2021. Sources: JP Morgan, Bloomberg, and S&P/LCD. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Wider yield spreads. CLO spreads typically are wider than those of other debt instruments, reflecting CLOs’ greater complexity, lower liquidity, and regulatory requirements. Compared with investment grade corporates, as well as other higher-yielding debt sectors – notably high yield and bank loans – CLO spreads are especially compelling.


CLO Spreads Are Compelling Versus Other Debt Sectors
CLO spreads versus comparably rated corporate bonds

CLO Spreads Are Compelling Versus Other Debt Sectors
Source: JP Morgan, Bloomberg, and S&P/LCD, as of 31 August 2021. US CLO debt represented by the JP Morgan CLOIE Index; IG credit: Bloomberg US Credit Index; High yield bonds: Bloomberg US Corporate High Yield Bond Index; Leveraged loans: S&P/LSTA Leveraged Loan Index.


Low interest-rate sensitivity. Leveraged loans and their CLO tranches are floating-rate instruments, priced at a spread above a benchmark rate (such as Libor,9 Euribor, and SOFR). As interest rates rise or fall, CLO yields will move accordingly, and their prices have historically moved less than those of fixed-rate instruments. These characteristics can be advantageous to investors in diversified fixed income portfolios.

Attractive risk profile. As demonstrated by a variety of key metrics, with impairment rates the most notable example, CLOs have historically presented lower levels of principal loss when compared with corporate debt and other securitized products.


Low Cumulative Impairment Rates
CLO impairment and loss rates (1993-2019)

Low Cumulative Impairment Rates
“Impairment rate” is the terminology used by Moody’s for CLOs, which is most easily understood as the default rate for CLOs. A CLO has the ability to “cure” itself, and it is only upon final maturity that a tranche is recognized as “defaulted.” The “loss rate” is the eventual loss recognized on the tranche at maturity.

As of 22 January 2021. Source: Moody’s, Barclays Research. CLO impairment and loss given default (LGD) rates by original rating and based on 10-year cumulative data over 1993-2019. Impairments split by principal (outstanding principal write-down or loss >50bp of the original tranche balance or security carrying Ca or C rating, even if not yet experienced an interest shortfall or principal write-down) and interest (outstanding interest shortfall >50bp of original tranche balance).


A Competitive Risk/Return Profile
A Competitive Risk/Return Profile
Source: Bloomberg, JP Morgan, S&P LSTA, Barclays. 9.5-year annualized returns and volatility as of 30 June 2021.


Lower default rates. Of the approximately $500 billion of US CLOs issued from 1994-2009 and rated by S&P (vintage 1.0 CLOs), only 0.88% experienced defaults, and an even smaller percentage of those, 0.35%, were originally rated BBB or higher (see table below). If we consider those deals rated by Moody’s, there have been zero defaults on the AAA and AA CLO tranches across all vintages (1.0 through 3.0).10


Even Vintage 1.0 CLOs Experienced Minimal Defaults
Even Vintage 1.0 CLOs Experienced Minimal Defaults
Source: S&P Global Ratings as of 2 August 2018.


Diversification. CLO correlations versus other fixed income categories are relatively low, meaning that many CLOs have historically increased the effective diversification to a broader portfolio.

CLO Correlations to Other Fixed Income Asset Classes
CLO Correlations to Other Fixed Income Asset Classes
Source: JP Morgan, Bloomberg, 9.5-year correlations as of 30 June 2021. CLOs represented by the JP Morgan CLO Post-Crisis Index. US Treasury bonds represented by the Bloomberg Long Treasury Index. US aggregate represented by the Bloomberg US Aggregate Index. US IG credit represented by the Bloomberg US Credit Index. Securitized products represented by the Bloomberg US Securitized: MBS/ABS/CMBS and Covered TR Index. High yield represented by the Bloomberg US Corporate High Yield Index. EM debt represented by the JP Morgan EMBI Global Diversified Composite Index.


Inflation hedge. CLOs’ floating-rate yields make them an effective hedge against inflation.

Strong credit quality. Unlike most corporate bonds, leveraged loans are both secured and backed by first-lien collateral.

… and important risks to consider11

The complexity of CLOs comes with a number of risks that investors should consider carefully.

Credit strength. While CLOs enjoy strong credit quality due to the senior secured status of leveraged loans, it’s important to keep in mind that leveraged loans carry inherent credit risk: They’re issued to below-investment-grade companies whose revenue streams are sensitive to fluctuations in the economic cycle.

Collateral deterioration. If a CLO’s loans experience losses, cash flows are allocated to tranches in order of seniority. Depending on the severity of the losses, the value of the equity tranche could be wiped out and junior loan tranches could lose principal.

Non-recourse and not guaranteed. Leveraged loans are senior obligations and, as such, have full recourse to the borrower and its assets in the event of default. A CLO, however, has recourse only to the principal and interest payments of the loans in the portfolio.

Loan prepayments. Leveraged loan borrowers may choose to prepay their loans in pieces or completely. While experienced CLO managers may anticipate prepayments, they’re nonetheless unpredictable. The size, timing, and frequency of prepayments could potentially disrupt cash flows and challenge managers’ ability to maximize portfolio value.

Trading liquidity. CLOs generally enjoy healthy trading liquidity – but that could change very quickly if market conditions turn. A prime example is the financial crisis, when trading activity for even the most liquid debt instruments slowed to a trickle.

Timing of issuance. While market conditions could be strong when a CLO is issued, they might not be during its reinvestment period. That’s what happened to the 2003 vintages, whose reinvestment period coincided with the onset of the financial crisis and its resulting drop-off in trading volume.

Manager selection. Historical performance of CLO managers encompasses a wide spectrum of returns, underscoring the importance of choosing seasoned managers with solid long-term track records.

Spread duration. While interest rate duration is low due to the floating-rate nature of CLO tranches (indexed off three-month Libor,12 Euribor, or SOFR), spread duration is a consideration that should be taken into account. Due to a typical reinvestment period of four to five years, spread duration is usually between 3.5 and seven years. The higher up the capital stack, the lower the spread duration, as each CLO is redeemed sequentially, making the lower-rated tranches longer in spread duration.


Corporate Credit Asset Classes Versus CLO Tranches
Corporate Credit Asset Classes Versus CLO Tranches
As of 30 June 2021. Sources: S&P/LSTA Leveraged Loan Index; Bloomberg Indices; JP Morgan CEMBI Broad Diversified; JP Morgan CLOIE. *1-year speculative default rate. **10-year geometric mean for all CLO tranches. Sources: Bank of America Merrill Lynch High Yield Strategy Default Rates/ Issues 5 July 2017; Moody’s: Structured Finance: CLOs - Global Impairment and Loss Rates of US and European CLOs: 1993-2017, 25 June 2018. Past performance is not indicative of future results. There can be no assurance that the target will be achieved.

Note: Libor references above should be considered illustrative as this rate is effectively ceasing by the end of 2021. Please review “Risks Related to the Discontinuance of the London Interbank Offered Rate (“Libor”)” found at the end of this presentation for more information regarding this transition.


Choosing the right manager

The most critical decision a CLO investor can make is the selection of a manager. It isn’t easy: There are approximately 175 managers13 with postcrisis CLOs to choose from, and each creates its own portfolios using its own investment style. And it’s worth repeating that historical performance among managers greatly varies. That said, successful managers tend to share several key traits.

Extensive experience

There’s no substitute for deep CLO management experience, which provides the combination of skills, practice, tactical and strategic savvy, adjustment-making, and chronological perspective needed to generate strong returns in such a complicated asset class.

Chronological perspective may be the most important aspect of experience in the CLO world, as the benefit of having managed portfolios before, during, and after the financial crisis is incalculable.

Excellence of execution

Managers should show strong abilities in the vital competencies that collectively define best-practice portfolio management. These begin with loan selection, as creating a strong collateral base lays the foundation for potential success. Trading skill enables the manager to know when to take gains, avoid losses, and adjust the portfolio as market conditions evolve. Effective management of deteriorating credits affects not just the specific credits involved, but also the entire CLO due to the way cash flows are distributed through the tranche structure. And the reinvestment of principal proceeds in new collateral can make the difference between good and great performance.

Expertise in handling risk

Sound risk management is both a cause and effect of these best practices: It informs everything the manager does and is reflected in the results. In addition to oversight of the portfolio, it includes skillful execution of coverage tests; the ability to understand the nuances and idiosyncrasies of CLO documentation, which is nonstandard and complex; and a talent for balancing the numerous portfolio metrics by optimizing as many as possible while taking a hit on as few as possible.

I was a young guy and got in an argument with an old tight ass on my desk when I told him that CLO ratings were bogus because I didn’t believe that over collateralization meant a higher credit quality. Adding more CCC paper isn’t going to result in higher quality…..you just have more crap. The market has changed since then but these were the early Fitch CLO days.

Yeah, my CRE CDO we were at least originating our own debt, bridge loans, mezz and B notes. Some shadow rated when larger but including a big B note on a sloooy National Kindercare synthetic net lease portfolio and a 88% LTC floater on the Ole Mellon Bank bldg that was empty at the GW bridge to a Korean engineering firm that both retraded us at closing for more proceeds and also lied about retenanting as office when they really planned to try to convert to condos because the view of Manhattan was dope. Throw in a crappy Palm a Royal hotel the dbag who went to jail for buying your boy in CT Jim Rowland’s daughter a condo in DC to a hairy Ohio note purchase financing we didn’t even have clear path to title to a 93% LTC mezz loan on a b garden style multi up 91 between New Haven and Hartford, single tenant paycheck office in Penfield NY, holiday inn with crazy earn out in Woburn. The bought debt was stretched more but had quality sponsorship or collateral
Compared with what we originated on the street which was to put it kindly “below IG”.

[jhu72]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

... wonder how his stockholders in his other companies feel about this - paying a premium so Musk can play games with Twitter. I am sure they will think it is a great idea.

In other Musk news, hate speech on Twitter is way up. MTG, Jim Jordan and other members of the republiCON scumbag caucus give it two thumbs up.

GM became the first advertiser to cancel, for multiple reasons. Real easy decision to make.

[Farfromgeneva]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

... wonder how his stockholders in his other companies feel about this - paying a premium so Musk can play games with Twitter. I am sure they will think it is a great idea.

In other Musk news, hate speech on Twitter is way up. MTG, Jim Jordan and other members of the republiCON scumbag caucus give it two thumbs up.

GM became the first advertiser to cancel, for multiple reasons. Real easy decision to make.

I’ve been trying to pound that point on his levered equity position but may not have come through because I spastically get in the weeds quick like in the last few pages and rip off 40 idea that are domain specific and lose everyone. But…

Rich guys in general are not liquid. They keep their money and assets earning and pledge them to borrow for liquidity all the time. The reason the life insurance premium finance industry is so big is rich guys borrow for back whole life policies then turn around and pledge the cash surrender value to get money to do other things. (There was a tax code change in the 80s where rich people couldnt stuff tons of cash into them day one in a single pay premium, invest in stocks through the policy ans get tax deferral treatment - called modified endowment contract)

Elon pledges his tesla equity all over the street like a crackhead who’s sold the same watch 15 times. It’s smart up to a point to retain control of his businesses while monetizing the “Musk is god” premium applied to his businesses valution in publix markets (has there ever been a bigger key man risk in any business and related enterprise value in the history of US business?). However while leverage amplifies returns, enforced discipline where it doesn’t exist when under-leveraged and can offer other benefits it amplifies losses and can turn into a negative feedback loop vortex like a flushed toilet the way our Chicago Boys jammed up half of Latin America by being too dogmatic in their approach in the 70s.

Jamie Dimon - (“sigh, I hate this f’ng guy. We’re still on mute right?”) “sure Elon we’d love to lend you $x Billion against some of your tesla stock as long as you maintain a 2:1 collateral coverage (50% LTV).

Later: “so umm Elon, that 25% decline in the share price? I need you to put up more shares or put down our debt here. You wanna sell some shares because you can’t legally pledge more and retain control of Tesla? Sure we’ll block Trade those but in this size it’s going to have to be at a 5-10% discount to the current and already decinging price and you’re going to have less ownership of tesla now. Oh yeah and when we do the math on the now lower share price we actually will be making another margin call next week for more cash you don’t have or shares.”

One day activist investors control 10-15% of the float and put pressure on Elon to step down. Now what for Tesla, SpaceX and Twitter? Sounds extreme but this happens all the time to rich and smart guys who don’t leave themselves enough slack. And Jazz Elon vs Right brain Elon doesn’t value slack or spare capacity we’ve seen. He relies on his intangible franchise premium to society to float that.

Elon Musk will be the most indebted CEO in America if the Twitter deal goes through

Published Thu, Apr 28 2022 2:34 PM EDTUpdated Fri, Apr 29 2022 11:10 AM EDT
Tesla head Elon Musk talks to the press as he arrives to have a look at the construction site of the new Tesla Gigafactory near Berlin on September 03, 2020 near Gruenheide, Germany.
Tesla head Elon Musk talks to the press as he arrives to have a look at the construction site of the new Tesla Gigafactory near Berlin on September 03, 2020 near Gruenheide, Germany.
Maja Hitij | Getty Images
The world's richest person could soon add another title to his name – America's most leveraged CEO.

Two-thirds of Elon Musk's financing for the $44 billion deal to take Twitter private will have to come out of his own pocket. That pocket is deep. He has a net worth of about $250 billion.

Yet because his wealth is tied up in Tesla stock, along with equity in his SpaceX and The Boring Co., Musk will have to sell millions of his shares and pledge millions more to raise the necessary cash.

According to his SEC filings, Musk's financing plan includes $13 billion in bank loans and $21 billion in cash, likely from selling Tesla shares. It also includes a $12.5 billion margin loan, using his Tesla stock as collateral. Because banks require more of a cushion for high-beta stocks like Tesla, Musk will need to pledge about $65 billion in Tesla shares, or about a quarter of his current total, for the loan, according to the documents.

Even before the Twitter bid, Musk had pledged 88 million shares of the electric auto maker for margin loans, although it's unclear how much cash he's already borrowed from the facility.

According to research firm Audit Analytics, Musk has more than $90 billion of shares pledged for loans. The total makes Musk the largest stock-debtor in dollar terms among executives and directors, far surpassing second-ranked Larry Ellison, Oracle's chairman and chief technology officer, with $24 billion, according to ISS Corporate Solutions, the Rockville, Maryland-based provider of ESG data and analytics.

Musk's stock debt is outsized relative to the entire stock market. His shares pledged before the Twitter deal account for more than a third of the $240 billion of all shares pledged at all companies listed on the NYSE and Nasdaq, according to Audit Analytics. With the Twitter borrowing, that debt could soar even higher.

Of course, Musk has plenty of cushion, especially since he continues to receive new stock options as part of his 2018 compensation plan. His 170 million in fully owned Tesla shares, combined with 73 million in options, give him a potential stake in Tesla of 23%, at a value of over $214 billion. The rest of his net worth comes from his more than 50% stake in SpaceX and his other ventures.

He received another 25 million options as part of the plan this month as Tesla continued to meet its performance targets. While Musk can't sell the newly received options for five years, he can borrow against them.

Yet Musk's 11-figure share loans represent an entirely new level of CEO leverage and risk. The risks were highlighted this week as Tesla's share price slid 12% on Tuesday, chopping more than $20 billion from Musk's net worth. Shares of Tesla were down less than 1% on Thursday afternoon.

Musk's bet also come as other companies are sharply cutting back or restricting share borrowing by executives. More than two-thirds of S&P 500 companies now have strict anti-pledging policies, prohibiting all executives and directors from pledging company shares for loans, according to data from ISS Corporate Solutions. Most other companies have anti-pledging policies but grant exceptions or waivers, like Oracle. Only 3% of companies in the S&P are similar to Tesla and allow share pledging by executives, according to ISS.

Corporate concerns about excess stock leverage follow several high-profile blowups in which executives had to dump shares after margin calls from their lenders. Green Mountain Coffee Roasters in 2012 demoted its founder and chairman, Robert Stiller, and its lead director, William Davis, after the two men were forced to sell to meet margin calls. In 2015, Valeant CEO Michael Pearson was forced to sell shares held by Goldman Sachs as collateral when it called his $100 million loan.

Jun Frank, managing director at ICS Advisory, ISS Corporate Solutions, said companies are now more aware of the risks of executive pledging, and face greater pressure from investors to limit executive borrowing.

"Pledging of shares by executives is considered a significant corporate governance risk," Frank said. "If an executive with significant pledged ownership position fails to meet the margin call, it could lead to sales of those shares, which can trigger a sharp share drop in stock price."

In its SEC filings, Tesla states that allowing executives and directors to borrow against their shares is key to the company's compensation structure.

"The ability of our directors and executive officers to pledge Tesla stock for personal loans and investments is inherently related to their compensation due to our use of equity awards and promotion of long-termism and an ownership culture," Tesla said in its filings. "Moreover, providing these individuals flexibility in financial planning without having to rely on the sale of shares aligns their interests with those of our stockholders."

The exact amount that Musk has borrowing against his shares remains a mystery. Tesla's SEC filings show his pledge of 88 million shares, but not how much cash he's actually borrowed against them. If he pledged the shares in 2020 when Tesla stock was trading at $90, he would have been able to borrow about $2 billion at the time. Today, the borrowing power of those shares has increased tenfold, so he could have room to borrow an additional $20 billion or more against the 88 million shares already pledged. In that case, only about a third of his Tesla stake would be pledged after the Twitter deal.

Yet if he's increased his borrowing as Tesla shares have risen in value, he may have to pledge additional shares. Analysts say that if Musk has maxed out his borrowing on the 88 million shares (which is highly unlikely) and he has to pledge an additional 60 million shares to fund the Twitter deal, more than 80% of his Tesla fully owned shares would be pledged as collateral.

That would leave him with about $25 billion in Tesla shares unpledged. If he also has to sell $21 billion of Tesla shares to pay the cash portion of the Twitter deal, as well as the accompanying capital gains taxes, virtually all of his remaining fully owned stock would be pledged.

According to SEC filings, Musk sold about $8.4 billion worth of Tesla shares this week. He tweeted Thursday, "No Further TSLA sales planned after today." Yet his plans for raising the rest of the $21 billion in cash needed for the deal remain unclear.

Either way, Musk will be putting a large share of his Tesla wealth at risk, which could make for a bumpy ride ahead for Tesla shareholders.

Borrowing against shares, Frank said, "exposes shareholders to significant stock price risk due to an executive's personal financing decisions."

[Farfromgeneva]

https://www.sec.gov/Archives/edgar/data ... sc13da.htm

https://www.sec.gov/Archives/edgar/data ... ex99-c.htm

Thanks, saved me time fumbling through Edgar for it.

What stands out to me is that it’s led by US domiciled banks but then its all
yankee banks after the book runners who were Morgan Stanley (reportedly somehow hedged the exposure but I don’t know how it was a perfect hedge on the credit) & BofA. I don’t see a lot of the next tier of banks at all in the syndicate.

Leads have 47% and 53% of the secured (skimmed is it TL B only or bridge and RCF too, TLD?) facility is owned by BNP, Barclays, Mitsubishi, Mizuho and SocGen.

No JPM, Goldman, Citi, PNC, CapOne, USBank, Truist, Regions, Silicon Valley Bank (lot bigger than anyone would realize a top ten Us bank now with $250-$300Bn in assets) and none of the canadian guys, RBC, BMO, TD.

That’s a signal of something I’m just not sure what. Not that those banks didn’t make the cut. Probably felt there was no cross sell and they’d get stiffed on the fee income economics.

I heard it’s not being syndicated. It’s underwater. 475 over for the senior “secured” first lien debt that might be leveraged 8-10x.

My guess is that the underwriting group is going to try to average up by getting a premium from Musk on other capital market activity….. maybe. This deal is a loss leader.

... wonder how his stockholders in his other companies feel about this - paying a premium so Musk can play games with Twitter. I am sure they will think it is a great idea.

In other Musk news, hate speech on Twitter is way up. MTG, Jim Jordan and other members of the republiCON scumbag caucus give it two thumbs up.

GM became the first advertiser to cancel, for multiple reasons. Real easy decision to make.

Should add that finance to corporate America is based and has been since a few years after glass steagall repeal of “give the credit away and make it on cross sell and fee income”. Tying loans to IBanking economics was sort of outlawed after the tech meltdown and guys liek Frank quattrome (CS), Mary Meeker (MS or
Goldman I forget which shop now) and the infamous “this stock is dogs*it. Oh did I hit reply all, dammit”) Henry Blodgett. Meanwhile a strong bank analyst named Mike Mayo has had 17 jobs in 20yrs because he has the temerity to ask hard questions about his clients/research names. Equity research is nothing more than corporate access for ibankers largely the last 20-25yrs. Lending cannot be in any way tied to other services in any manner the credit has to stand on its own two feet. So now we talk about “holistic relationships” and all sorts of other elegant language in code.

That being said you go to a syndicated loan investor meeting, typically a nice spread at the Waldorf unless it’s CS doing some junky high yield deal then you get a second floor room in a decaying hotel in midtown and see the peeling wallpaper next to your uncomfortable chair and the CFO spends a half hour taking about their bond activities, FX, interest rate hedging and other few income generating services.

That’s what TLD means by getting that premium. It’s really building to an all in risk adjusted return on capital for the customer relationship. If subsidized debt via deposits and managed central bank activity didn’t have the affect of commoditizing credit we’d have more price discovery in lending markets than we do so it’s far more opaque.

I’m working on getting additional debt capacity for a non bank lender. They have $350mm today need a billion ultimately. It’s a tight margin quality lending business. Bank lender group head ans I are talking the other day ans he’s looking for pricing guidance from me because I’ve managed to convince him we’re negotiating from a position of strength which just ain’t true. I told him the pain point in a new relationship has a lot to do with them as to pricing at the “asset level” which is the bank pricing for the credit facility but that they greatly value and are loyal to all their banking partners and are acutely sensitive to providing a strong profitable risk adjusted return to their bank relationships and will ensure that it’s mutually beneficial. What I’m saying and the head of cap markets will later get on the phone and flat out tell the banker is “keep that loan credit spread tighter that a southern Baptists butt cheeks and we will make sure you get paid just fine”. Will give them 10bps co mgr roles pro rata on bond issuance, hold excess cheap deposits (below market yield) at bank, offer opportunities in other areas so you best not show up above Sofr + 190-200bps but between full utilIization, turn of assets and funding flow we can provide (plus payment processing income) you’ll get to 225-250 on that 90% advance rate facility were asking for.

[Kismet]

Musk tweeting about Paul Pelosi conspiracy theories (that it was a gay encounter gone wrong)

GM has paused their adverting with Twitter

Welcome to America where the inmates run the asylum.