Marble Point - Why Senior Secured Loans Owned Via CLOs

Why Senior Secured Loans Owned Via CLOs

Marble Point believes CLOs provide an attractive way to obtain exposure to loans

STRENGTH OF THE LOAN ASSET CLASS AS RAW MATERIAL

Loans are senior to subordinated bonds and equity capital, which provides a “margin of safety” to loan investors. In addition to ranking ahead of subordinated capital in terms of priority, loans benefit from a first priority pledge of the borrowers’ assets as collateral. These two key features have led to high historical recovery rates in instances of default as illustrated below.

Illustrative Company Capital Structure

Assets

Cash

Receivables

Inventory

Property

Plant

Equipment

Brands/Logos

Intangibles

Subsidiaries

Liabilities and Equity

Senior Secured Loans
First priority pledge of assets

Subordinated Bonds
Generally unsecured

Equity

% of Capital
Structure

40-60%

10-20%

30-50%

Illustrative purposes only. The actual capital structure of a borrower may vary.

Moody’s Average Recovery Rate (1987–2016)

80.6%

Senior Secured
Loans

48.4%

Senior Unsecured
Bonds

Source: Moody’s Investor Service.
No representation is being made as to the applicability of historical relative recovery rates to future periods. The information shown herein is for background purposes only.

This high historical recovery rate, in conjunction with the fact that loans are floating rate assets, has contributed to a track record of consistent annual returns over the past two decades. As illustrated below, the Credit Suisse Leveraged Loan Index (“CSLLI”) has experienced only two years of negative total returns in its 25 year history:

Annual Total Returns for the CSLLI (1992 - 2017)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

6.8%

11.2%

10.3%

8.9%

7.5%

8.3%

5.3%

4.7%

4.9%

2.7%

1.1%

11.0%

5.6%

5.7%

7.3%

1.9%

-28.8%

44.9%

10.0%

1.8%

9.4%

6.2%

2.1%

-0.4%

9.9%

4.2%

Source: Credit Suisse. Past performance is not indicative of, or a guarantee or, future performance.
The Credit Suisse Leverage Loan Index tracks the investable universe of the US-denominated leverage loan market. Index returns do not reflect any deductions for fees, expenses or taxes. You cannot invest directly in an index.

CLO EQUITY HAS HISTORICALLY GENERATED STRONG ABSOLUTE RETURNS WITH A LOW HISTORICAL LOSS RATE

96% of US CLOs issued between 2002 and 2011 had a positive return to the equity tranche, with only 4% returning less than the original invested capital. The median IRR on these CLOs was 15.5% and the annual vintages with the highest IRRs were 2006 and 2007, which had median IRRs of 17.0% and 18.5%, respectively.

Distribution of CLO Equity IRRs (2002 – 2011 Vintages)

IRRs over
15%

Positive IRRs
up to 15%

96%

CLOs with positive equity returns

CLOs with negative equity returns

Source: Marble Point analysis.
This chart shows certain performance data for CLO 1.0 vintages. For this purpose, CLO 1.0 vintages are defined as US broadly syndicated cash flow CLOs that were originated from 2002 to 2011. Information for later vintage CLOs is not as complete and therefore is not shown. The figures presented in this report do not reflect any projections regarding the returns of any investment strategy and all returns earned on CLO investments will be reduced by any applicable expenses and management fees. Actual performance of a CLO investment will vary and such variance may be material and adverse, including the potential for full loss of principal. In particular, MPLF is only invested in CLOs issued after 2011 and no representation is being made with respect to the returns of such later issued CLOs. CLO investments involve multiple risks, including unhedged credit exposure to companies with speculative-grade ratings, the use of leverage and pricing volatility. The analysis was prepared by Marble Point an its affiliates based on their proprietary analysis of data sourced from Intex, Bloomberg, Moody's Investors Service, and proprietary CLO Manager presentations. While the data and information contained in this report have been obtained from sources that Marble Point considers reliable, Marble Point has not independently verified all such data and does not represent or warrant that such data and information are accurate or complete, and thus they should not be relied upon as such. In addition, for purposes of this analysis, IRRs were calculated at the CLO level net of all CLO-related expenses and some of such IRRs have certain inherent limitations as they are calculated based on certain underlying assumptions, which may under or over compensate for the impact, if any, of certain market factors and financial risk, such as lack of liquidity, macroeconomic factors and other similar factors. The IRR calculations assume an initial cash investment equal to the par balance of the equity tranche. For redeemed CLOs, the equity IRR is based on reported Intex cash flows or manager reported realized returns where Intex data was not available. For active CLOs, the equity IRR is based on reported Intex cash flows and assumes a terminal equity value equal to the CLO’s NAV as at 31 December 2017. Such assumptions may not be reflective of actual market conditions in the past, present or future. Past performance is not indicative of, or a guarantee of, future performance. Additional information relating to this analysis is available upon request.