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.
