Yesterday was quiet around our place–not that we were out late on New Years Eve because I was in bed by 9:30 p.m., but just because there were no plans of any type and I am not a real sports fan anymore so all the bowl games held little attraction. So this seemed a good day to do some reading–which is what I did.
I focused on collateralized loan obligations (CLOs). In the last couple months most of my reading has been on CLOs–trying to get a firmer understanding of the moving parts and pieces. Yesterday a fair portion of my reading was a study by a few NYU professors. It was a long piece of 52 pages and looks at performance from the 1990’s to 2020–times that preceeded most of the current CLO publicly traded companies (i.e. Eagle Point, Oxford Lane etc.). It is pretty complex, but with patience one can understand it.
The bottom line is that the items I focus on in a macro sense are correct (in my mind) relative to CLO owners. For instance GDP, employment and interest rates. These simple pieces of data can provide a reasonable ‘warning sign’ for potential dangers ahead in the CLO sector. I am not saying that CLOs will be hurt massively–but I am saying that other investors might believe this is true thereby moving in a large way to sell off the shares of the CLO owners and their preferreds and baby bonds.
Additionally, I find those more company specific pieces of data that I watch closely are at least close to right on. Specifically, I watch the net asset value of the common shares (which is published monthly by each of the companys), the coverage ratios (since I hold only senior securities and want to know my margin of safety) and I watch the ability of the company to raise money by selling common shares (thereby keeping the coverage ratio high).
Now specifically I own positions in 9 different securities that have large exposures to CLOs. While the number of positions is fairly large the actual shares are modest–none more than a 25% position. I list these all on my ‘laundry list’ page.
Why do I hold these? Because of my conservative positioning in 50% of the portfolio I need to try to balance the low coupons with some higher coupons. Do I feel this is too aggressive? NOT too much in the current economic conditions. Will I watch the data points I mention above? Absolutely!! Honestly with the uncertainty out there with a new ‘administration’ I will be more focused than usual on the data–both macro economic and micro (company specific) data.
Tim –
You might find this to be helpful. There is a link to an excellent academic paper. The key point to me is that CLO Equity generates abnormal returns of 5-6%.
https://jacobslevycenter.wharton.upenn.edu/clo-performance/
We have been warming up since the last ice age. Hopefully with all the carbon we are releasing we will prevent the next one.
Tim,
I read a book that I’d recommend.
CLO Investing with an Emphasis on CLO Equity and BB Notes by Shiloh Bates
It’s a recent (2023) paperback book written by a fellow who has been involved in the CLO market for a long time. The book is very readable and provides a great background. on the market. The CEFs in this space are really banks selecting their loans via the CLO syndications.
It’s available on Amazon.
FWIW, I’m long the term preferreds from Eagle Point Income.
Thanks Greg–I will check that one out.
Thanks for the recommendation. The beginning of the book can be read for free here: https://books.google.com/books?id=zmHWEAAAQBAJ&printsec=frontcover#v=onepage
I’m enjoying it so far. It seems like a lot of deep detailed information, although the presentation so far seems a little scattered.
I’m sticking with the term dated securities that have asset coverage / redemption limits.
ECCU
EICB
ECCC
I have Full positions in these and are used to ‘juice” a little more income.
With rates staying higher for longer, I will have time to accumulate safer securities (fingers crossed).
Not enough history behind the company of SPMA for me to take the plunge.
PRH had a nice dip this week but already have a full position in this.
I have full positions in all my IG perpetual issues.
I want to accumulate over weight shares of UTHY – 4.5% from the government paid monthly for the rest of my life but there is still 5.5% IG qualified out there as well.
Have all the BDC shares I like.
Not sure what my next move is. Sit and wait until golf season in the north east I suppose. This is a good problem to have actually.
Happy New Year to all,
Be Safe
Absolutely the right choice for me as well PickleNick (term dated and baby bonds). Now even the mention of golf season makes me feel good–even a mild Minnesota winter is too cold for me.
Tim: Winters can be tough, it’s only supposed to get up to 72 degrees here in my part of the California south coast, I better wear a light jacket today when I run with the dog 🙂
The wife and I are going to the beach tomorrow – busy getting visiting relatives out of the house today. There is something about sending a Happy New Year’s picture from the beach on a 70+ day in SoCal to those shivering thru the winter elsewhere. Plus, it helps justify paying these ridiculous California prices. Yeah, but winter here is a little rough, will only be above 70 for a few hours tomorrow, might need a jacket in the evening…
The short dark and cold days of winter make me lazy. The winters here in Northern Cal. are wet and been what I call “normal” the last few years, but I have been here for over 45yrs and I have seen a gradual trend of it getting warmer and drier with the rainy season starting later and ending later.
I hope I don’t jinx my luck, but I no longer cover my citrus or avocados or hang old fashioned Xmas tree lights on them.
When I was selling hardwood lumber 15 or 20yrs ago the mills were telling us harvesting of certain trees like maples was going farther North in states like Minnesota, Wisconsin and Michigan because the trees range was receding. Who knows Tim, you may be able to grow citrus someday there.
Charles—they have been saying warmer for years–but going from say zero to plus 5 is technically warmer–but still feels damned cold to me. If we didn’t have 9 grandchildren within 50 miles I think we would have exited Minnesota years ago.
Tim, It’s hard to dislodge a mossy boulder but we have two grandkids in Washington and 3 great-grandchildren in Washington. One of our kids is single and wanting to follow her daughter to San Diego which leaves us with just one kid and his wife in the Bay area.
I would probably have to give up the citrus and avocados but keep the sheep. Is it worth it to be colder?
Picklenick, thanks for sharing. Hard to say what the long term future holds. Two sides to companies who are new and those who have been around awhile. I went with a little SPMA because being new they have no baggage starting out fresh. Older companies in the CLO business hopefully learned from the GFC but there are a few bad apple managers from that time out there.
From what I have read, I get the impression that because rates have stayed higher for longer BDC’s are having higher rates of non performing loans and the quality of borrowers has declined and more of them have upped their risk fighting for business with other BDC’s and loans to higher risk clients.
PE funds and their managers have complicated matters running BDC’s and buying insurance companies. Buying a lemon and squeezing it for juice are you going to get enough back for what you borrowed to pay for it and pay staff and investors?
Wonder how this compares to running a restaurant?
Well, I’m too indolent to run a restaurant and I would be at the bar drinking the profits.
“SPMA because being new they have no baggage starting out fresh”
Well played, Don’t think I would have thought of the situation like that.
How many really old companies have been victims of their long dated own success and have become a fiasco … BA, GE, T
Pondering the point, “You have to make sure the juice is worth the squeeze.”
You have to squeeze for the juice,
but it may not be worth it,
but you have to squeeze to see if it is worth it
but it may not be worth it.
I get caught in a loop here, needing a counter to kick me out to a sub routine to solve my problem. This generally takes a few drinks.
Be Safe
Thanks for the chuckles Pick
Cheers !!!!