CLO managers are ‘wary’ about the technology, media and telecom sector, said panellists at the Global ABS conference on Tuesday.
Historically, TMT companies have been considered resilient in economic downturns, but the confidence in their stability has led to highly levered deals in the sector, said Till Schweizer, senior portfolio manager at Partners Group. With rising interest rates, these high debt ratios are turning into a risk factor.
Healthcare businesses have similar problems, Schweizer added. Both sectors also struggle with inflation, since companies are not always able to pass on cost increases to customers. Cash flows are therefore getting tighter.
Cyclical companies, which traditionally would be expected to struggle in an environment that is somewhere between stagnation and recession, could in fact be better prepared for the end of the free money era.
“Because everybody knew they would be cyclical, they are structured with much lower leverage,” said Schweizer.
Good businesses can be found in unpopular sectors and vice versa, so it makes sense to focus on a company’s cash flow rather than its area of business, said Josh Eisenberger, managing director and head of US CLO management at Sculptor Capital Management.
However, he agreed that TMT deals have been done with “ridiculously” high levels of leverage. “The cash flow view has rounded into a sector view.”
In general, panellists took the view that volatility provides credit-picking opportunities to build a portfolio, but investors being scared of uncertainty is making pricing deals more difficult.
Schweizer said that, while he believes in a positive outlook for existing CLOs, he is concerned about new deals if M&A activity does not pick up again.
Jakob Vonkalckreuth, managing director at Credit Suisse Asset Management, agreed that the biggest mid-term danger was a lack of reinvestments after CLOs run out.
As the biggest risk for the US market, Eisenberger identified an increasing competition of alternative capital with CLOs. He also warned that markets underappreciated the danger of permanently higher rates, which make it difficult for companies to service their debt obligations.