Neuberger launches fund as CLO popularity rises

Demand for the securitised loans is strong but covenant standards raise concerns

Neuberger Berman has launched a collateralised loan obligations (CLO) Ucits strategy, which already has $77m seed funding and will be marketed towards sophisticated investors.

This year has been one of the strongest for the securitised loans, surpassing high issuance in 2017. US issuance is expected to hit $150bn (£118bn) in 2018 compared to the previous record of $124bn in 2014, according to Wells Fargo.

The Neuberger Berman CLO Income Fund will invest primarily in US dollar and euro-denominated floating rate CLOs with a focus on mezzanine tranches. It is fortnightly dealing.

One investor Portfolio Adviser spoke with thought the limited dealing may put off some investors.

However, Architas investment manager Mayank Markanday said fortnightly dealing isn’t unusual in the loans space. The Axa-owned multi-manager sold out of its position in the Fair Oaks Income fund dedicated to CLO equities – the riskiest tranche – in Q1. Its main exposure to CLOs is now through the Twentyfour Income fund, which invests in other types of debt securities, such as high yield, mortgage-backed securities (MBS) and asset-backed securities (ABS).

Markanday said he didn’t have a preference for investment trusts versus open-ended funds, although he noted the former could be more volatile.

In the closed-ended space, the Carador Income fund launched in December 2008. It has returned 51.8% over the last five years, compared to 23.8% in the Investment Trust Debt sector over the same period, according to FE Analytics.

Neuberger loans team

Neuberger Berman portfolio manager Pim van Schie (pictured) said CLOs are typically issued with significant credit enhancement to absorb credit losses in the underlying loan portfolios.

Van Schie will manage the portfolio with Joseph Lynch and Stephen Casey. The trio are part of the US asset manager’s $43bn non-investment grade and structured credit team.

Neuberger has strong capabilities in loans, says Markanday.

Covenant concerns as CLO popularity rises

Neuberger’s head of Europe, Middle East and Africa (Emea) Dik van Lomwel said they had had significant interest from clients seeking additional yield and fundamental credit enhancement via CLO debt.

The securitised loans have been popular for several years, according to Markanday. This is because they provide relatively high yield in a market environment where investors are struggling to find that in traditional income assets. They also employ floating rate loans, which means they do not face capital loss in a rising interest rate environment.

However, Architas sold out of Fair Oaks to reduce risk in its portfolios. It had done well for Architas over the period they had held it, since 2015, Markanday said.

He added: “One of the concerns about CLOs are about the underlying loans themselves. The covenant standards for loans have been dropping over the last couple of years. There’s been huge issuance of covenant-lite loans. It’s not a problem at the moment because corporate profitability is in good shape, but because there’s so much demand for yield from investors it acts as an incentive for issuance of lower-rated CLO tranches.”

Below investment grade is where the risk is, according to Markanday.

The fund is registered for sale across the European Union, including the UK.

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