This marginal pickup in activity comes despite some of the main credit rating agencies downgrading a number of borrowers while higher financing costs have also been prohibitive. S&P, for instance, has put 13.9% of its outstanding CLO ratings on a negative credit watch while Moody’s confirmed that more than 1,000 classes of US CLO tranches are at risk of being downgraded.
Nonetheless, CLO issuance levels could pick up following amendments to the Volcker Rule, which came into effect on October 1, 2020. The revisions ease regulatory restrictions on the type of assets CLOs can invest in. This could enable CLOs to start adding bonds to their asset pools and even potentially equities and equity-like securities.
Despite the recent low issuance volumes, the CLO market has been transformed by Covid-19. Recent CLO issuances appear to be adopting more conservative structures as a shield against future potential volatility. A report by Fitch Ratings – published in July 2020 – said that the average AAA credit enhancement had increased for US syndicated loans and European CLOs, adding that the average reinvestment period and weighted average life covenant had also reduced. Covenants are in-built protections designed to protect lenders from borrower risk.
It is very likely issuers will be forced to adopt stricter covenant terms too. With credit risk rising exponentially at many corporates, some of the glaring deficiencies in pre-Covid-19 covenant structures (i.e. the ubiquitous use of covenant lites) are expected to become a thing of the past. A number of market experts also anticipate that post-Covid-19 transactions will be underpinned by more robust collateral pools and that CLO legal documentation will become increasingly flexible so as to accommodate for the expected rise in distressed assets.
IDENTIFYING THE RIGHT TECHNOLOGY
If CLO market participants are to navigate these volatile markets, they need to utilise effective technology solutions to help them do so. In order to mitigate inefficiencies and the risk of making critical decisions off the back of inaccurate data, CLO managers need a homogenised front, middle and back office which is interconnected through a singular system.
At the same time, CLO managers are facing increasing pressure and scrutiny from investors, regulators and ratings agencies. In order to meet these growing transparency requirements, managers need to have better insights into their investment composition and operational processes. This can be facilitated by making use of best of breed technologies which can support all types of CLO assets; automate repetitive processes and data entry; simplify workflows and unite the front, middle and back office.
SOLUTIONS THAT STREAMLINE THE ENTIRE INVESTMENT LIFE CYCLE
From portfolio management to research, trading, and compliance, Broadridge delivers a purpose-built and robust suite of solutions that help CLO Managers make better investment decisions. Designed to be adaptable to any process or workflow, the Broadridge CLO platform aggregates data from internal and external data sources, empowering users with a single, awardwinning, integrated solution. Our solutions support the entire investment life cycle and can be modelled for any workflow, store any data, and integrate with any system.
Reconciliation and Data Aggregation
- Fully automated cash and position reconciliation
- Centralise data into embedded data warehouse and seamlessly leverage third party data
- Aggregate multiple sources of risk, pricing and other relevant time-series data into user-defined dashboards
- Interfaces available to multiple trustees
- Project waterfall results over life of the deal
- Configure each payment period independently and dynamically apply principal and interest, including test cures
- Incorporate scenario testing into analysis
- Minimise mistakes by streamlining approvals and next action steps
- Leverage Diagnostic Utility to identify missing data, prevent errors and identify stale pricing
Research, OMS and Trading
- Capture, calculate and analyse the creditworthiness of issuers and assets
- Monitor investment pipeline , improve asset selection and combine analyst reports, rating reports, and financial statements
- Allocate trades across CLOs
Pre, Post-Trade Compliance Engine
- Manage across rule libraries, including portfolio and organisation limits, coverage and collateral quality tests
- Calculate recovery rates and rating derivation on underlying assets
- Test hypothetical trades simultaneously across all CLOs
- Determine Maximum Permissible Trade Amount based upon the compliance “cap space” for each participating CLO