Credit intensiveness & complexity

JANA clients invest across a number of different credit sectors. Each sector can have different overall characteristics, and each has reacted at times in different ways to the current COVID-19 influenced environment.

However there has been one consistent theme in credit markets, that had developed through 2019 and was really amplified by the current events: The more credit intensive and the more complex and opaque a security or sector is, the worse it was punished in the COVID-19-dominated stressed environment, and the slower it has been to recover.

One of the most credit intensive, complex sectors JANA clients make small allocations into is BB CLOs.  We have written about them before on JANA Spark. BB rated CLO’s, being both very credit intensive (a leveraged form of syndicated bank loans) as well as highly complex instruments, suffered longer and deeper losses than almost any other sector of the credit market. The below shows both the defensive losses BB CLO’s have suffered, and the longer drawn out cycle they have experienced. BB CLOs registered their lows on March 25 2020, a full week after the lows seen in the higher quality and more liquid Investment grade Credit markets.  They also took nearly 2.5 months to recover about 75% of these losses, whilst IG credit has taken about a month.

BB CLOs have certainly made up for lost time recently, providing nearly 31% returns for investors since the end of April (as against IG credit which has returned +1.4% and HY bonds which have returned +7.3%).

This is a timely confirmation of our views that CLO’s, being credit intensive and complex, can be highly volatile, but for long term investors or those able to rotate quickly into opportunities, they can deliver very strong term returns.