- Collateralized debt obligations, or CLOs, are a nearly $1 trillion asset class.
- Dealmakers, traders and investors told us how they made their careers in CLOs.
- He explained how they were winning over investors in a space that has had a fair share of critics.
Wonky. health and fit. And, insiders say, misunderstood.
Welcome to the fuzzy world of CLOs, or collateralized debt obligations, where low-rated loans to indebted companies are pooled into a bond and then sold to investors with varying degrees of risk.
CLOs were beset in 2020 by a wave of pandemic-induced rating downgrades for loans that tripped the structure of the CLO portfolio. While this temporarily impacted investor returns, the overall recovery of credit markets and the reopening of economies enabled the CLO to not only recover but set the course for a banner 2021.
CLOs, however, are not without their critics.
US Treasury Secretary Janet Yellen and former Bank of England Governor Mark Carney have warned about Risks of CLO exposure to debt markets, particularly for their high leverage and low-quality loans to indebted borrowers.
Unlike their much discredited but structurally different cousins with collateralized debt obligations, CLOs have weathered economic woes and provide investors with a rare dose of double-digit returns.
From cash-up investors, to the people who structure and manage these complex vehicles, to the professionals who advise them, Businesshala gets to know some of the faces behind Initialism.
Businesshala spoke to 12 industry executives about the CLO-issue boom, product developments in recent years, and how to find careers in this corner of Wall Street.
This list is not a league table nor a definitive ranking, but a spotlight on the leaders of the various CLO professions.
For a look inside the CLO’s explosive return, click here.
Buy side: Dealmakers who raise capital, manage and invest in CLOs
Managing Director, Senior Portfolio Manager, US CLO at Blackstone Credit
Like many in the CLO ecosystem, Blackstone Credit’s Rob Zable perfects his craft in leveraged finance.
In 1995, fresh from Cornell, Zable joined Chemical Bank (now JPMorgan) under the tutelage of so-called Jimmy Lee. architect of the modern syndicated-debt market.
Bankers will have to work hard to find a better leader. Lee created the bank’s private-equity sponsor coverage; Today, this is the lifeblood of the CLO.
“When we did the allocation at the chemical bank you had to map the vehicle to the manager. I had all the CLOs on a piece of paper. It was like my decoder ring,” Zable told Businesshala.
While the asset class has moved beyond a single piece of paper, the CLO thread is largely woven by people like Zable.
Industry veterans agree that the asset class is tight-lipped. Seasoned players trace their roots to leveraged-finance shops such as JPMorgan or Deutsche Bank.
“In the early stages there were many people coming out of traditional lending backgrounds,” Zable said. Many CLO specialists started their shops after learning the ropes at Donaldson, Lufkin & Generate or Bankers Trust. Credit Suisse bought DLJ in 2000, while Deutsche Bank bought Bankers Trust in 1998.
Blackstone similarly grew its CLO business inorganically, when it acquired GSO Capital Partners in 2008. GSO was rebranded as Blackstone Credits last year.
Zable, who joined Blackstone in 2007, said the asset class has expanded. As a manager, he is in the trenches, analyzing new loans and determining whether they are a good fit for Blackstone’s CLO. It is a combination of trading and credit analysis for the asset class around $1 trillion.
That development has filled recruiters with a mandate for experienced structured-finance bankers.
When asked about Blackstone’s talents, Zabble moved his camera around to reveal a training session between the two employees.
“CLOs are unique, requiring specialized structuring and portfolio management skills, original fundamental research,” he said. “The competition for talent is tough everywhere, but the specific aspects and complexity of a CLO make it even more challenging.”
In the first quarter, Blackstone Credit only finalized two CLOs worth $1 billion. Last year, it raised about $2 billion through five CLOs, according to data from Refinitiv.
A Blackstone spokesperson said less than 0.5% of Blackstone Credit’s liquid loan portfolio defaulted in 2020, compared to a 4.4% default rate on the Credit Suisse Leveraged Loan Index.
Partner, Co-Head of Liquid Credit, Head of US Loans and Structured Credit at Carlyle Group
Be it an interview or panel discussion, Carlyle’s Lauren Basmadjian can dissect the technical factors affecting credit markets in the blink of an eye, recalling the LIBOR rate of the day.
According to one recruiter, she is known for her ability to raise large sums of money for CLOs. Today, she oversees nearly $31 billion in assets for the private-equity giant, which is enjoying its busiest year ever as a CLO.
“If you can raise money, which is the name of the game in the CLO, you stand out,” said the recruiter. “You know Lauren can go out there and raise money.”
Cash is important for a CLO, as it enables a portfolio manager to start taking out loans. Vehicle launch companies can attest to how challenging it can be to get funding, especially for the riskier installments of a CLO.
While Basmadjian is a rainmaker today, his introduction to the CLO came at a difficult time.
She joined Chase in 2001 shortly after JPMorgan’s acquisition was announced, and she feared she would be cut off once the firms merged the incoming classes of analysts.
“I was worried. I had student loans to pay off,” Basmadjian told Businesshala. “I wanted to know which group needed just one analyst so I wouldn’t be made redundant in six months.”
She landed on Chase-owned former business Octagon Credit Investors, an investment-management firm that has been ranked in the upper echelons of CLO volume in recent years.
“I didn’t know what a CLO was. But it seemed like a safe place to park,” Basmadjian said.
After nearly 20 years with the firm, she joined Carlyle last June. The private-equity firm was looking for experienced campaigners to zoom in on lending opportunities at the height of the pandemic.
It has proved to be a masterstroke. According to the firm, this year has been Carlyle’s most active year for new CLO prices. It issued new CLOs worth $1 billion in the second quarter alone, up nearly $2.2 billion from the first quarter.
CEO of Napier Park Global Capital
Opportunistic investors are best remembered for their performance during periods of economic pressure.
Napier Park, an alternative-investment manager who doubles as a CLO investor and manager, is basking in the success following the COVID-19-induced market dislocation.
The firm often plays in riskier classes of CLOs, such as equities or single B- and double B-rated debt tranches, leaving it exposed to bouts of volatility as well as higher returns.
Last year, the asset manager bought more than $3 billion worth of CLOs, according to its chief investment officer, John Dorfman, at a time when most investors were selling or clearing troubled assets. This year it has also generated more than $2.5 billion in sales, he said.
In 2020, Napier Park placed an emphasis on trades that yielded handsome returns, and JPMorgan recognized it as a top active portfolio-management artist.
Trade publication HFM Global named Napier Park’s European team the winner for long-term credit performance, while CreditFlux ranked it as the No. 1 credit hedge fund in 2020, when it posted a healthy 30.26% return.
“As concerns about COVID-19 intensified in the last week of February, we took action to protect our portfolio,” CEO Jim O’Brien said.
O’Brien said the firm grew cash balances before the pandemic hit, and hedged exposure to travel and leisure credit before the sell-off in mid-March.
The quick cash mobilization gave it a means to buy disorganized paper during the peak of the sell-off.
“We have seen increased interest from both debt and equity investors,” O’Brien told Businesshala.
O’Brien and Dorfman formed Napier Park in 2012, but their careers spanned decades with Citi and Morgan Stanley.
The pair founded asset manager Carlton Hill Global Capital in 2006, but had little contact with CLO before Citi bought the business and moved it to its alternative-investment arm, Citi Capital Advisors, in 2007.
It was not until 2012, when the company secured contracts on five CLOs, that it was moved to the asset class.
CLO Portfolio Manager at Octagon Credit Investors
After some self-discovery, Lauren Law found the Octagon.
After her graduate studies and a few internships that didn’t pique her interest, Law was encouraged by a college professor to explore the world of structured finance and joined the Octagon in 2004.
Like many in the space, she worked as an analyst and a trader before becoming a portfolio manager in 2018.
According to industry experts, managers like Law who can toggle between kicking the tires on companies’ credit while trading debt in and out of a portfolio are often destined for success in CLOs.
Law today manages some of the company’s CLOs and invests in competitors’ vehicles.
According to Refinitiv data, Octagon, one of the asset class’s more prolific issuers, raised $2.4 billion in five CLOs last year and $3.1 billion in 2019 through six. Most lift no more than a few vehicles each year.
“We are a large issuer, so we know a lot of repeat investors,” she told Businesshala. “It’s a niche, collegial market, but awareness is growing.”
This increase is evident in this year’s activity. In May, Bank of America estimates that the new CLO will have about $140 billion in investments.