The CLO owner company’s – Eagle Point Credit, Oxford Lane etc, hold portfolios of leveraged loans–loans to company’s rated BB or lower. As such I watch the data on the overall collateralized loan obligation (CLO) market whenever I can find it.
Here is an article from S&P Global on defaults etc in the leveraged loan sector. It is one of the best overviews of the market that I have seen in quite a while.
Users who liked this:
A difference in definitions of a “Default.” A missed payment is a default for S&P (1). For Morningstar/LSTA US Leveraged Loan Index a missed payment is not a default if there is a waiver (2). Temptation: a CLO-type sponsor can make its portfolio defaults go away by granting loan waivers, amends/extends etc. Flashback to 2009, how can bad debt have good ratings?
(1) “Issuer missed principal or interest payment on a loan instrument ”
(2) “Issuer missed principal or interest payment on a loan instrument without forbearance”
Also, “…(the Morningstar/LSTA)… default rate excludes selective defaults from distressed debt exchanges.” (Remind me of Lumen’s downgrade to Selective Default after its debt exchange.)
All predictions for 2025 are coming in rosy but times do change. JMO. DYODD.
Steven Bavaria – on SA, has a primer- ‘CLOs for Dummies’ (Jan 20,2021) – very informative. He is probably the best I’ve seen on the topic. He also has links to
XA Investments webinars ( also in print ) – it’s the XA Octagon XFLT.
Gary–I like to read Steve, but he has crashed and burned a few times so I am careful.
Here is the masterclass from Tom Majewski of Eagle Point who I consider the wizard of CLO’s.
https://innovativeincomeinvestor.com/collateralized-loan-obligations-a-masterclass-from-tom-majewski-of-eagle-point-credit/
I’ve watch that video before several times, just to ensure full comprehension. It is well worth the time for anyone who truly wants to understand CLOs.
Nice to read an honest forecast. Defaults can drop from 1.26% down as low as 0.75% but if things don’t go as hoped they could rise to 2.5%. Nobody knows for sure.
Dan, They have a better crystal ball than I have to see 9 months out. I do like how they have 3 scenarios and what if this happens then this could be the result. This will change as we get about 3 months farther into 2025
Charles–lots and lots of unknown–there are always unknowns, but right now I think there are more than ever.
My suspections are we will have some very good clues on the future by the end of January with more coming in early March (when the continuing resolution runs out) and then sometime late spring or early summer (when the debt ceiling is reached). Maybe we have a Speaker of The House by then…. I’m stocking up on popcorn as I ran out last week. Thinking about getting a couple of cases…..
danzeb–absolutely correct–no one knows.
Well, Read this article and just maybe I will sleep a little sounder tonight as I do own some of the Eagle Point equities! I have always considered the CLO companies offering great returns at a higher risk and try to keep them a small pat of my portfolio.
dj–I have more than I have ever had in my life—term preferreds and baby bonds. You can be certain I will keep a close eye on them.
Tim:
Check out the date of the article (11/27/24) and the following comment:
“Declining interest rates, easing inflation, and lower upcoming maturities–alongside a still resilient economy and earnings growth–are several of the factors that lead us to expect a lower speculative-grade default rate ahead.”
This article was written BEFORE the most recent Fed meeting and their decision to reduce their forecast to only 50 basis points in rate cuts in 2025. IMO, there is a strong chance that they do none….or even have to raise rates next year.
I am shocked that you are loading up in the CLO sector at this point in time. One could easily argue that it will never get better than this. Most of these CLO CEFs invest in the first loss equity piece. Spreads are near all-time lows. Your margin of safety is minimal.
But good luck.
Papa Doc–I am only loading up relative to the past and given I am heavily stocked with CDs and MMs my portfolios remain conservative overall.