“The second quarter volatility has changed the investor base," said Guggenheim director Nirjhar Jain during a panel on day two of ABS East. "Hedge funds, ones that did well, are still in the product, but the others are less relevant. Hedge funds have been less active, and CLO opportunity funds have become more active.”
Raymond James managing director Brian Linde said: “There is good liquidity in the higher part of the capital stack, and definitely less further down, but it has improved materially since the beginning of the year.”
While liquidity has improved, the rising tide has not lifted all boats when it come to the universe of CLO managers. In the latter half of this year, the ability to buy and sell bonds has improved for paper from a select handful of managers, while “tiering” has pushed other bonds into a different category of secondary market pricing.
“Earlier this year there was a complete lack of liquidity. The one difference between now and then is that there is a huge disparity among issuers in terms of that liquidity,” said Reginald Fernandez, an executive director at Natixis.
The issue of manager tiering has been a big topic in the primary market, where issuers are separated into three tiers based on the pricing they can achieve, but the issue is also rearing its head in the secondary market in a bigger way as the market moves into the end of the year. Linde noted that manager tiering is “sticky”, but not necessarily tied to how well the bonds from a particular issuer are performing.
“Looking at top tier managers, a lot of them get more liquidity... Among less favoured managers, one of the big trading opportunities out there is to pick out the less favoured managers who are performing well,” said Linde.
“Senior investors have approved lists and investment committees," added Matthew Matson, vice president of securitized products trading at Deutsche Bank. "It has become a matter of checking a box, not relative value. If a name is on a list, it can be bought. I would argue that the liquidity you are paying for with managers is one of the most important things.”
According to the panel, CLOs have surpassed other securitized asset classes in how easily buyers can trade in and out of the bonds. CMBS and RMBS, for instance, are not as “well defined”, according to Jain, with CMBS liquidity a “fraction” of that of the CLO market.
And while regulation has cut into the market-making appetite of the primary dealers, it was noted that this has created an opportunity for hedge funds to come in and provide liquidity in their absence, according to panel moderator Serhan Secmen, managing director at Napier Park Global Capital.