M&A activity, tiering and the paucity of new collateral are all potential headwinds for CLO managers, especially for smaller players and new entrants. Against this backdrop, proactive CLO management is an increasing differentiator.
Current CLO market conditions could provide early-mover advantages for active managers, as failure to sell out of problematic credits in a timely manner could result in underperformance.
“Historically, CLOs have been a passively managed asset class. But investors are looking for better yields and to get better returns out of their investments by proactively managing the CLO structures. 40-50% of CLOs are going past their reinvestment period in 2023-2024. Managing CLOs during a post reinvestment period requires a lot more complexity to manage non-scheduled paydowns and credit impairment sales to meet compliance constraints. For those managers, the path to least resistance is to pay down the bonds which doesn’t align with their investor’s expectations,” explains Michael Pusateri, CEO at Siepe.