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Laila Kollmorgen

lines on the record: 97
first: 2024-09-11
most recent: 2024-09-11
sittings or episodes: 1
sources: podcast

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“Are we going to go much lower in interest rates is obviously the question. So when the duration trade is on, it's a fantastic trade and CLOs are not going to be able to outperform that. We know that. That's just the case. What we do know is that”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Well, you know, I think we were quite blessed in the past few years because we were in a rising rate environment. So as a floating rate portfolio manager, you're able to work with what you have. There is a little bit of, you're not having to compete, and let me explain. We know the age duration trade is about, is in the making. To some extent, it's been put on if you were to buy the 10-year few months ago at 470 and it's now at 380. That's a great trade. Nobody's going to take that away from you. If you had entered into mortgages or IG, when the tenure was at 470, that's brilliant. That's a duration trade. If rates stay where we're at, that's the end of the duration trade and you're done. We've seen the performance in IEG mortgages and high yield. So you're done for the year.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“So at this point where CLOs have rallied so much, I just want to read a few statistics for our audience that the average price from your paper, the average price of AAA to BB rated CLOs is now above par with prices for these portions of the capital stack in the 97th percentile or higher relative to prices over the past five years. So some of the CLO award, a lot of the CL world is breathing pretty rarefied air in terms of valuations. Do you think this creates an opportunity to outperform and really pick the wheat over the chaff where, okay, if the next three years CLOs perform well, but it's not like the previous three years where CLOs just crush everything else in fixed income for a variety of macroeconomic reasons and it really does pay to do security selection protecting not only against defaults but against buying something at 101 and then you get paid back 100 because you got”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“We know that can't just buy a AA or a single A or a triple B. You in fact can add value to the portfolios that are constructed and you can in fact add value through security selection. So it's a little bit more than just buying a rating or just buying CLOs at a particular rating. I think it's important to also understand that there are some variations in the investment process as well.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Huge. A large part of this has been education, making that differentiation that a CLO is not an ABS-CDO, has nothing to do with US subprime. There is a reason why the performance has been very, very different over the last few decades and why it's been much better and why it should be considered for ETFs. And through this education, what we have found is it's a little bit of disbelief at the beginning. Why does this look so good? is without a doubt a large part of the response that we get when we go through the education, but it comes down to the structure. It comes down to the collateral. And then ultimately, it does come down to people like myself and my team here at Pine Bridge and what it is we're doing, you know, which are the CLOs that we're selecting, because there are differences. You can't just buy a AAA.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Across the different types of institutional investors, pension funds, again, continue to increase their allocations to CLOs. And again, what we find with family offices, et cetera. So then you have that demand, everybody taking a look and saying, what worked over the last few years and what didn't, CLOs worked. So even if you just move portion of your portfolio 10, 20% into CLOs, you're getting a higher yield, you're getting less volatility, and a higher sharp ratio. And that's making a lot of asset allocators really, really happy and making their headaches go away. So that's really important. And this launch of ETFs, that's the other thing. As we take a look at ETFs opening up finally, CLOs, which has been an institutional market for decades, to retail investors, that is huge.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“We'll also be doing the same. We also know from again because of the Basel III endgame changes, increased demand will also come from European banks around the world. Basel III end game regulations get mirrored ultimately in its own format in the United States given what happened with regional banking crisis. We again see demand for AAA and AAA CLOs from the US banks. Then we take a look at that performance changes in insurance company demand as well. Again, insurance companies around the world, there is absolutely nothing better than CLOs. Investment grade CLOs for insurance companies, long-term investment books, whether it's a property and casualty or a life insurance company, putting that investment into CLOs has proven very good. We have found, again,”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“We have found that banks are increasing their exposure to CLOs. Part of that also has to do with changes in regulation, what's known as Basel III Endgame, is changing the capital charges for AAA tranches for banks from 20% to 15%. Again, because of the very good performance, no AAA nor AA security has ever defaulted or lost money. When you put that in combination with highly regulated entities such as insurance companies and banks, they're looking at CLOs given the very high sharp ratio and the incredible performance. Once again, they're saying there is nothing better that we would like more of. And as a result, Norranchin is selling its loss-making investments and putting it into CLOs. When Norin Chukin does that, you know that other entities in the region.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“And so Nora and Trukin in 2021, 2020, they bought, just like SVB, they bought treasuries, they bought long dated mortgage-back securities, they bought IG bonds at really, really low coupons. And then unfortunately, what they found is that, you know, it wasn't just enough coupon income given their current needs, which are demanding a higher payout. So they found literally that they needed to sell them because literally the income was just not sufficient. And Norn Chukin is selling that quite publicly. It's come out with the press that they're going to be selling those marked market loss-making securities, and they're going to be rolling that into CLOS. And very similarly, as we talked about with the regional banking crisis in the United States,”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so Norin Chukin happens to be one of the most experienced investors in the CLO market. They have been in the market for at least 30 years. They have been investing. A portion is an agricultural bank in Japan. They have a very large portfolio in”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“CLOs is can you just talk about the demand for AAA CLO securities? And I mean, you've got a chart from your most recent article on Pinebridge.com. And it's about Narin Chukin's bank and you should just show how much potential the demand could be. Can you just explain a little bit of the work you've done there?”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Security CLOs and took more credit risk and way less duration risk. Of course, they would have performed better over time when inflation went to 9%, interest rates was from zero to 5.3%, and defaults were low. So credit risk did not really materialize that much. And duration risk absolutely was a horrible risk to take. It's important for say for the audience that the performance of asset classes are dependent on macro regimes. So if inflation goes back to 10% and interest rates go to 7%, I think it's fair bet to say that high yield will probably outperform the 30-year treasury bond. But if we have a recession and interest rates go down, credit risk spreads go out, you know, CLOs, high yields will likely perform worse than long-duration treasury. So I think the point is to kind of be an asset class for all seasons and be a long-term investor rather than just say, oh, this performed well. And a lot of that was because of this environment. Final point, Layla, but before we move on to get it really in the weeds of”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“You mentioned Yellen's point about it wasn't a credit issue. It was a mark-to-market issue. Absolutely correct that it was not a credit issue. Of course, Fannie Mae is going to pay you back. But the mark-to-market, saying it's mark-to-market, makes it sound like the true, you bought it at 100, the true value is still at 100, but it's just, it's a fire sale. So people are panicking. So the best bid you can get is at 94. But actually, I think you bought it at 100. The economic value of it went to 85 because interest rates went up. And you can no longer pay your depositors 0%. And I think that loss is real. And yes, of course, hindsight is 2020, but if everyone invested in floating rates.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“A true appropriately diversified investment portfolio. And as a result, it really took them down when things went against them.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“just a demonstration of when you need liquidity when you have market downturns many market participants turn to CLOs because of the fact they are so high quality in demand have a high price because their floating rate in nature and this allows you to raise cash we do this at Pine Bridge across all of our strategies across our opportunistic credit strategies multi-asset strategies etc so we we use this the same way as the UK pension funds do and banks you know also as part of their own risk management and part of their own treasury functions and not just banks we see this also corporations invest in CLOs for that very same reason now just because it's out there doesn't mean it's done and that's where you have Silicon Valley Bank and other similar banks that didn't invest in CLOs did not have an”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“They went for their most liquid highest priced assets, which were AAA and AAA CLOs. And they sold out of those. And the market short traded off a bit. But as soon as they were done raising the cash they needed to, the market came back in CLS.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“The problem is that not enough of the Treasury Departments were taking a look at investing into asset-backed securities and into CLOs. And when we take a look at CLOs, those banks that had investments in CLOs did not have that same level of mark-to-market losses. Again, not credit issue. mark-to-market because that's the math. And as a result, those who did have higher exposure to CLOs in particular did very well. And to just to make this point a little differently, when I meet with UK pension funds, so there was the UK LDI crisis when you had list trust government happen. What UK pension funds do is that they have a significant allocation to CLOs because it is liquid. And when they needed to raise cash,”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“So Silicon Valley Bank really epitomized how there were banks that really, and unfortunately it comes back down to the GFC in large part, but the regulations incentivize banks to hold US treasures, to hold mortgage-backed securities because you get a 0% risk writing charge against it. And as a result, they are incentivized to do so. And when you take a look at what Yelen was saying at the time that Silicon Valley Bank happened, she was saying, it's a mark-to-market issue. It's not a credit issue, which is absolutely accurate. But when you're taking a look at your own portfolio, whether it's a bank portfolio or whether it's your own portfolio and it's a fixed coupon in investment and interest rates have risen, okay, that is the math. The price goes down when interest rates go up.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Their investments really showed that when we take a look at their bank holdings, it's quite evident that they could have done more in CLOs. But as you point out, there were also banks that didn't do any CLOs. That's the real issue”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“If I'm trying to paint a picture about why collateralized loan obligations have performed so well, part of it, perhaps you would say, is the virtue of the structure, the virtue of the over collateralization, part of it is the fact that fixed income investors, giant institutional firms, banks, insurance sponge, pension funds have just been burned so badly on interest rate exposure. You know, I think of Bank of America, which has literally half a trillion dollars of securities that have lost enormous amounts of value as interest rates have risen. If they had invested in CLOs, of course, hindsight is 2020, they would have done a lot better.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“The last happens to do with the fact that so you've got this investor base, which has a very strong allocation to investment grade tranches. But it also has to do with just the historical performance. So you do have pension funds in the BBB and the double B and in the equity tranche. You have asset managers. You have family offices. They invest into all of the lower rated tranches because of the high levels of current income. as well as historical performance. So we find that overall, that level of volatility is mostly felt in, I would say, the BBB and below tranches, but really the below investment grade tranches. And the more senior tranches don't have that level of volatility because in part because of the investor base and partly because of the floating rate nature of the asset class.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“which tends to be between 12 and 15 percent per annum. So in reality, you can have a significant amount of defaults and losses before you would ever hit any of the debt tranches. So let's call it 40% out of 50% recovery. It's a huge amount and it's something that you have to keep in mind when you're looking at why is it that CLOs have performed so well and why is it that they haven't had that very high level of volatility. It is because of two things. One is the fact they're floating rate. The second has to do with the types of investors that purchase CLOs, particularly the investment grade tranches. Those tend to be banks and insurance companies around the world.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Credit enhancement. And let's just take a look at the double B trunch. So you have approximately 11 to 12% subordination below the double B tranche. And what this means is that your CLO can in fact withstand a significant amount of defaults and losses before you would ever get any losses at a double B tranche. And that's a minimum, let's say that 11%. We can, as I mentioned, CLOs or leveraged loans have a recovery rate of 60 to 70 percent if we assume something more like 50% just because it's an easy number, that credit enhancement itself means that you could withstand 22% of your portfolio defaulting before you would have any dollar loss. That's a huge amount. It means that you've got somebody who's or something catastrophic has happened. And that's not even including what's known as excess spread.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“It's twofold. It has to do with how CLOs are structured. So as we mentioned at the beginning of the call, it's a securitization, which means that you have what's known as a capital stack. So we start at the top with AAAs. Below that's AAs, below that's single A, below that's BB. So those are the investment grade tranches. And then we get to a double B tranche. And occasionally we see a single B and then we have what's known as an equity or residual. But it means that a CLO, if that underlying portfolio has any losses, it's applied to the equity tranche. If things go badly for whatever reason, there's a lot of tests, performance, and quality tests that ACLO manager must pass. And if they don't pass for whatever reason, payments made to the more junior tranches go to repay the senior tranche. Now, because of the way this works, it does mean that you have what's known as subordination. So we call it cushion.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Is basically unit of return per unit of risk or unit of volatility. And that can be observed just by looking at a CLO index. It's almost like a straight line or as close to a straight line as you're going to see in finance. And so it's kind of like it's going up every day. Why is it the case that it's going up every day? And let's say there's a collection of bonds, high yield bonds, even treasuries that have returned the same as CLO index, but they've done so over a much choppier path. So if you could hold on and you don't care about volatility, they would have returned the same thing. But a lot of people do care about volatility. So the better performing one on a volatility just basis would be the CLOs. Why is it that in the top security world of high yield, things money comes in, money comes out, but in CLOs, it's been extremely unusually calm weather. Why is that the case?”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Have the highest chart ratio when you compare it versus investment grade, high yield, even leveraged loans, any type of fixed income, asset class, what you find is that CLOs in investment grade CLOs in particular have the highest sharp ratio compared to any of those other fixed income sectors.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“predominantly invested into fixed coupon sectors and as a result you know when we are talking to so many different investors you know they didn't have enough exposure to floating rate they didn't have any exposure to CLOs and what we saw is that their portfolios took severe hits and we have demonstrated that if they had an allocation of 10 or 20 percent to CLOs two things happen first they're able to increase the yield on their portfolios they're able to secondly reduce duration in their portfolios and thirdly they are able to increase their sharp ratios so sharp ratio has to do with your level of return per unit level of volatility so it's one of these measures a lot of people take a look at to say well how risky is this and CLOs have an investment grade CLO tranches”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“At a spread to the increases in the index. It was changing from LIBOR to sofa at that time. We made that transition to the new index. And as it stands, I think when we're taking a look at performance, again, through 2023, we also found that CLOS continued to outperform, and that really was due to the below investment grade tranches. And again, through 2024, we're still taking a look at outperformance, mainly through the below investment grade tranches. That said, we haven't had to deal with the duration uncertainty that you mentioned. Investment grade, the ag, high yield, mortgages, treasuries have all had massive levels of volatility. That's what has led to severe underperformance for those portfolios that were”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Data point that we like to point out is that of the last 11 years, CLOs have been the best performing fixed income asset class in eight of 11 years. It's surprising to many, but we say that it's an institutional asset class. And it's only through some changes and regulations, so we've been able to now finally have ETFs in CLOs. And that has really only been in the past three years. We launched the ETF with Van Eck in June of 2022. And as you very well know, 2022 was an absolutely dismal year for fixed income. CLOs were the only asset class that returned a positive that year. And that is because it is floating rate. So certainly we were taking advantage of the fact that the Federal Reserve was with increasing interest rates. We are a floating rate product. As a result, we were also trying to...”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Collateralized loan obligations. I mean, I'm just looking at an index that you're not managing Van Ac does not manage, but just a broad passive index of CLOs. And that since January 1st, 2022 is up a little over 20% from now. And over that same time period, a lot of fixed income investors have been absolutely destroyed by duration, by interest rate risk, because interest rates have gone up. There was a lot of inflation. So if you held agency mortgage-backed securities or long-term treasuries, you just basically got obliterated. Meanwhile, CLOs, which take much, much less duration risk. They take more credit risk. They've performed well. So just, you know, what's it been like been in a space when a lot of the fixed income world has really taken it on the chin, whereas your sector has been performing quite well?”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“That big difference, one set of eyes, two set of eyes, all within the same company, or hundreds of institutional investors who are telling you, you know, it's okay to lend to staples, for example. It's okay to lend to Fogot de Chao. It's okay to lend to. And your boss who's making the decision to lend.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“But when you're taking a look at a market like a bank loan, a leverage loan, you don't have this one set of eyes or maybe two sets of eyes that we're taking a look at the validity, at the quality, let's say, of that mortgage. This was the problem. The investment bank originated the mortgage, they securitized it. They were the one set of eyes. In the case of a CLO, it's the fact that your collateral, in fact, is vetted by hundreds of institutional investors, professional institutional investors. And I think that's the huge, huge difference is that level of just from the basic level, it's two different types of collateral, and there is the validation, external validation. So important that makes it”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“There was known as market value CDOs. I think that you're referring to market value CDOs, and that indeed was it was meant to be actually a protection. That was why it was instituted. Unfortunately, the market moved too fast. So a lot of the market value deals blew through their triggers, and it became kind of a negative situation. You were chasing the market down and therefore it didn't actually end up acting as a protection to the note holders, the most senior note holders. In fact, it in fact worked in the exact opposite direction. So I think to keep in mind, and I always say this, it comes down to the collateral. When you're talking about liar loans and you're talking about false data, there's not much you can do about it. You know, fraud is fraud.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Thank you. And so, yeah, both CDOs and CLOs, they issue liabilities to investors and the assets. In the case of CDOs or mortgage-backed securities, it's subprime mortgages. In the case of CLOs, it's corporate loans. So you have that balance and the structure. And then the earnings, the income, the coupons from the loans go to pay the liability holders, the debt holders. And then there's also an equity tranche. So the fundamental difference is business loans to companies are a much higher credit than mortgages to people who are not being honest about their income when there's a giant mortgage bubble. Is there also a structural difference between the reinvestment period where some CDOs had collateral triggers where there were kind of fire sales when in CLOs there is no bank run because the liabilities are massed?”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“On who was actually originating that mortgage. In the contrast with a leveraged loan, you have hundreds of institutional investors who are independently analyzing and determining the credit worthiness of lending to a company. I think that's a major, major difference. It's the underlying collateral and the value of that collateral, but it's also about the origination process and the syndication process. So who is taking a look at the various different types of debt and how they're determining the risk associated with it. So I think these are very different types of origination undebt and again very different types of the ultimately the investor base when it comes down to the collateral.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“As a result, since the GFC, investment banks don't hold below investment great debt on their balance sheet. They literally syndicated. That means it's purchased by institutional investors, principally in the United States and Western Europe, but around the world. It is also purchased by CLOs. So you have CLO managers who are taking these loans, and it's each loan, leveraged loan, is analyzed by hundreds of institutions. credit analysts and they are independently determining the credit worthiness of that company credit. And that's very, very different than taking a look at what happened in the GFC and a subprime mortgage. You had one set of eyes that was originating that mortgage. Theoretically, maybe you had some oversight, but in reality, you didn't. You had one set of eyes.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Mortgages. They earned fees on securitizing those mortgages into RMBS deals. They earned fees on taking those RMBS deals and putting them into CDOs. So they created a vertical. And the problem was that they kind of shot themselves in the foot. And the regulators came in, looked at banks and said, wait a second, you know, we don't think your risk management is doing a really good job in managing risk. And you have too many disincentives along the way. So we're going to go ahead and make sure that these banks, which are very large, don't become a systemic risk to the system. And as a result, we're not going to allow you to hold below investment grade debt on your balance sheet unless you hold a lot of capital against it.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“So it always comes back down to the collateral. In the case of subprime, very different. We know what the issue was, lack of market regulation. Again, when we take a look at the leverage loan market, again, these are loans made to large corporations that are not investment grade in the United States principally. Principally, United States, Western Europe, Canada. That's where these loans are made. They used to be made and held on the bank balance sheet of all the banks you know. Bank of America, Goldman Sachs, Morgan Stanley, Merrill Lynch, Chase, JP Morgan, everybody. But because of the GFC, exactly what you pointed out, it showed that there was some glaring disincentives at the investment banks because they had bought a mortgage originators. They earned fees on originating.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Your garbage in becomes your garbage out. And that's what you have that one level of default and it go, you know, which is across a large swath of subprime mortgages feeding into levels of default in your RMBS, which led into levels of default in your CDO.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“You have all aware historically who don't have great credit. So it's not, so maybe they have to pay more. So there's certain little aspects about those mortgages, which are known as nonconforming mortgages. And as a result, when you pull a whole lot of these together, it should, in general, in aggregate, be okay, because not all of them are going to go bad all at once, oh, except they did. When you have a small amount go, that's kind of built in to the expectations of default and losses. However, when you have a large swath go wrong, that's your problem. So when you then take all the mortgages going poorly, that means the RMBS, the residential mortgage-backed security does poorly. And if the RMBS has been pulled together with many other RMBS transactions into a collateralized debt obligation, that's your problem.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“That were lie or loans. They were incentivized in a certain way to do so. They were compensated with bonuses, so they just kept originating mortgages, unfortunately, to people who never should have been able to get a mortgage or own multiple properties. And it caused valuations to go up. The problem is it comes back down to the valuation of that house, that mortgage. And when the valuations go bust, feed through to everything else. So those mortgages which were pulled together into a residential mortgage-backed security, theoretically, you were supposed to have a cushion of 20%, say, you know, to an 80% LTV. To most people who go and get a mortgage, their mortgage bank typically looks at them and says, we need 20% down, maybe 25%, depending on the kind of mortgage you get. Subprime, the issue is...”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“It has to do with twofold. First of all, we have a very simple saying, garbage in, garbage out. So that's the case of what happened in ABS CDOs. What we found with subprime, because subprime mortgages were originated, there was no real mortgage regulation. You had people that lied. So hence the term liar loans became prevalent. And when you have mortgages where you think that the, you know, again, comes down to what is the real recovery value in that mortgage. And if that is not an 80% LTV, it turns out that it's much, much less, that value of that home. That's really what it comes down to. What happens when things go wrong? What is that recovery value? So what happened is there were a variety of unfortunate incentives along the way from people who were able to originate mortgages.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Collateralized loan obligations where the underlying assets and underlying collateral are loans to companies. And perhaps you can show that difference by just how well CLOs performed relative to CDOs. Like they went through the worst great financial crisis ever other than the Great Depression and performed much better than CDOs. Why is that? Is it just that the bubble was in subprime? It wasn't in corporate lending or are there other structural reasons?”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“You take a look at a leveraged loan as the collateral in a collateralized loan obligation. And it actually has value. So in the event of things going wrong, there is a residual value to whatever may go into bankruptcy and makes it an ideal source of collateral in a securitization. And that's what makes CLOs, in fact, such an interesting product because of the very good performance historically over 30 years through the various different debt tranches. We can kind of go into it. That looks like. But what it does is that it has very low levels of default, has a very high yield, and a very low loss rate.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“Because the underlying collateral has a value. home has a value, an auto has a value. In the case of a corporate debt, in the case of a leveraged loan, it actually has a value as well. It's not as if you're buying equity in a company, which if it goes bust probably has no value. In fact, because it's a debt that is collateralized by some sort of an obligation from the company, it actually has a pretty high recovery value. So it is known as a first priority debt. So in the case of a bankruptcy, what you find is that a leverage loan obligation, if it's a first lien, has a higher recovery rate. And historically, that's been between 60 and 70 percent. Recovery in the event of a bankruptcy. Now compared to high yield, which historically has about 25 to 40 percent recovery rate, that actually looks pretty good. And that's one of the reasons why”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“So back in the day, it was known as bank loans. And banks used to make loans to corporations so that they could, of course, expand their businesses or maybe do a merger and acquisition or maybe a leverage buyout. And banks used to make these below investment grade loans on a regular basis. In fact, they decided to syndicate them, share the risk. So what they would do is share the risk with other banks. And then institutional investors said, well, wait a second, we want to get involved in this. So they started to purchase the bank loans as well. Well, the bank said, wait a second, we could get even more efficient and we can take some of this off of our balance sheet, which would allow us to make more corporate loans. And so they securitize them into a collateralized loan obligation. Now, the reason that a CLO or any other types of securitization are so attractive is”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT
“It goes back to the history of securitization, but ultimately the goal of ACLO or any other type of securitization was to free up bank balance sheet. It was an ability to enhance back in the early 80s, enhance home ownership by taking mortgages off of the bank balance sheet, pooling them together such that investors, many of them institutional investors could buy it such that they would be able to earn a nice return. The banks were able to free up some balance sheet and make more mortgages. Well, this type of science actually developed over the years to move away from just residential mortgages to auto loans or to credit card receivables. And banks ultimately said, well, wait a second, we could do this with our below investment grade lending to corporations.”
2024-09-11 · Forward Guidance · Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6 · IDENTIFIED FROM THE TRANSCRIPT