Thread by @gamesblazer06

CLO Equity Distributions (even in 90s Long more painful Recession) can turn off in a Recession for a bit .. even a long one… trade down to 20c.. & then catch up for the majority of deals.. BBBs ok.. BBs are a tweener (No man’s land) & AAA are the best Risk Adjusted Sweet Spot.

https://twitter.com/Stimpyz1/status/1556307271335915520

CLO Equity is a Very Attractive Asset.. in a Rising Rate environment especially in Year 3 of a Recovery:

1) 10x Levered Collateral Debt Securities
that are top of Cap structure.. where Issuers seeing higher EBITDA Op Lev Trump Rates… expression of Econ Strength.

2) Rising Rates (Front End) doesn’t impact EBITDA early in Cycle.. coz most issuers tend to start swapping out Rates by buying Payers or Caps (4 non myopic issuers).. & match against LIBOR payable to Banks.. so lock in longer term funding coupons.. & start to de-leverage..

3) CLO Equity gets benefit of Rising LIBOR coz Levered at 10x Equity Arb gets the benefit of the Funding Gap.. also the Equity is worth a ton more on the back end (Time Value) Post Reinvestment Period.. after Portfolios Am down in v chunky fashion….

& Big $ Cash Amort balances trapped get paid LBOR+ a fat spread instead of LIBOR - .. was case for 14 Years after 2008 GFC… these end up really improving Cash Equity IRRs.. especially early in Cycle when Cash IRRs rip to 18-20% trashing 12% modeled annual IRRs coz Defaults < 3%.

4) Yes, Deals are now Cov light but captured in the WARF.. & tons of All Loan Deals..but Equity Checks in P.E. Deals are orders of magnitudes higher than 90s.. & Recovery Values better coz no PIK toggles, Telco/Media Zero Coupons.. Huge Bond Carveouts…

4) the smaller bond carve outs for some newer deals..are now being used to generate huge Value with the Duration selling off… Buying Solid BBBs at low Dollar prices (good current yield)…improving WARF.. as well as it creates huge OC against future defaults.

5) CLO Equity = Super Low Duration… u aren’t gonna get trashed this Credit Cycle that’s gonna be nothing like 2008 GFC & more like previous ones ie Rates actually go up 4 Right Reasons = Growth coz not a “Balance Sheet Recession”.. We r gonna get over the Fiscal Stimmy hump &…

Goods to Services Normalizes w some higher Credit Costs along the way..& CLO Equity should continue to hum like a well oiled machine imho.

6) Also Indentures are much tighter (Article 12 in Docs “Substitution of Collateral Debt Securities” section ain’t the sieve it used to be

.. having a tight indenture is not just fantastic 4 AAAs at top of the Capital Structure… but also fantastic 4 “Sustainable” CLO Equity IRRs over longer pds. of time 3-5 years.

Net, Net: AAAs are Evergreen + CLO Equity = Great Probability Adjusted #EarlyCycle Outperformance