Cecilia Yu; Investment Analyst at Serone Capital Management, speaks on panel at LevInvest / European CLO Congress 2015 in London


How will quantitative easing in Europe affect the spreads and arbitrage of CLOs?

-Will we see tightening and compression of triple A spreads?
-Addressing the influence of quantitative easing on investor appetite and yield
-The impact of quantitative easing on corporate refinancing and the demand for CLOs

Key Points from debate:

-QE + ABSPP caused market to raise expectations in magnitude of spread compression in European structured credit space

-The secondary spread impact of ABSPP was however muted due to size and objective-ambiguity, standing at only €12bn at the time of discussion

-Those trying to front run ECB, and play the eligibility trade have been disappointed – esp in contrast of CLO performance YTD

-Market technicals balanced: limited supply, high spreads/relative value and yield chasing versus harsh regulatory treatment (Basel 3 and Solvency II)

-In the near/medium term QE is undoubtedly beneficial to both credit fundamentals, due to favourable refinancing terms via credit availability and accessibility, extending maturity wall across rating spectrum, and technicals, as a consequence of continued search-for-yield

-Contentious as it may be, changes in capital charges, however, could be more effective than large increase in QE in the secondary market, as regulatory burdens hamper incremental demand for paper

-In 2006/7 SIVs and conduits buying structured credit, but by 2013 very few banks involved

-We have seen some asset managers and insurers step in. There is some leeway in Solvency 2 for those who can create a valid internal model

-In the search for yield we would expect to see less-regulated players to increase participation, as CLOs still offer great relative value, while having exhibited a good deal of stability particularly in the senior end

-Relative value between CLO tranches across rating stack, in the cross current of regulation changes, corporate financing Debt/Equity dynamics, and credit market technicals, offer ample investment and tactical trading opportunities

-While SME CLOs comeback has been much anticipated, we find peer-to-peer securitisation could be a potentially viable competing asset class, given the break in traditional credit transmission mechanism post crisis

For further information on the event click link below:

LevInvest/European CLO Congress 2015

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