I see some questions on CLO’s (collateralized debt obligations) relative to Eagle Point Income Company (EIC)
This company invests mainly in the debt tranches of the CLO’s–just like debt of any company it is senior to equity. The vast majority of all of the CLO holding company’s hold ‘equity’ tranches of a CLO. In this respect EIC would seem to be a bit safer.
Here is the latest semi annual report from EIC which outlines what they intend to do investment wise–they can go up to 35% in equity tranches (most risky). It also has most recent data on investments etc.
Additionally here is something very basic I wrote almost 2 years ago which includes a chart which some may find helpful.
Steve Bavaria on SA is probably one of the best on the CLO funds.
Tim, thanks for the link to that 2019 article, with its informative graphic. https://www.investopedia.com/terms/c/clo.asp says “Equity tranches do not have credit ratings and are paid out after all debt tranches. Equity tranches are rarely paid a cash flow but do offer ownership in the CLO itself in the event of a sale.” If I understand correctly, that means a company investing in the Equity Tranche of a CLO will typically only see any money from that investment when the CLO is liquidated, correct?
Tim,
I saw this earlier and wanted to thank you before the day ends.
Posting that link and the chart reminded me all over again the Lehman Bros. meltdown in 2008 ?
This repackaging of debt and supposedly making it investment grade doing so. I still remember a article about a town in Norway that had bought into this and the dividends were to cover a retirement fund for teachers or something similar, only to find out it ended up worthless.
This idea of slicing and dicing equity of a asset is scary. I had a friend ? acting as a agent for a private loan company offer me a deal to loan the owner of a mini mart. Looked good on cash flow until you saw the employees were family who were not paid. If they had to actually pay wages the cash flow wasn’t as stated.
Thank you Charles M. I think as long as we don’t have an economic meltdown they will be fine–on the other hand there is plenty of risk, but this issue will be well received I think since the other options available are so minimal.
Such talk reminds me of the 2006-2007 time frame. ‘They’ had decided to open up HF’s and CEF’s to the field. Heard a great case by a new closed end coming to market specializing in CLO’s. They even brought in the manager. “We buy the tranches then buy and sell based on price action” razzle dazzle you get 8%!!
20 bucks turned into 3 bucks in a very short period of time. My friends in the Miami office went out to a bar with their wholesaler. Hear they ran up a $55,00 tab drinking some expensive whiskey. “Most expensive free drinks we ever had”.
Not to say this won’t work, just reminds me…!
I think the key here is to buy the preferred and baby bonds of these CLOS focused CEF/BDCs. The common stock of CEF/BDCs that specialize in CLOs is like fire – it can be a valuable ally if it is under control or a dangerous enemy if out of control. The preferreds typically have very strong covenants in order to conform to the Registered Investment Company leverage rules – to the point that CLO assets will be sold at fire sale prices or common will be issued regardless of the consequences to prop up the preferreds and stay within the leverage restrictions – or the preferreds get force redeemed at full face value to reduce leverage to meet the restrictions. This has happened several times in my memory. Here is one of Tim’s old articles on a Gabelli CEF that got in trouble, and it shows you the power of the leverage restriction and strong covenants. The Gabelli fund was a gold fund, not CLO, but the same restrictions apply. https://seekingalpha.com/article/265958-preferred-shares-of-these-4-cefs-for-a-conservative-outlook OXLC also got in a little trouble a few years ago and force redeemed a preferred that was trading at a nice discount, yielding a nice capital gain. And if you can get into these at a huge discount due to the a taper tantrum or a COVID panic, all the better….