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9Questions is our Q&A series featuring key decision-makers in leveraged finance — get in touch if you know who we should be talking to!

Wynne Comer is chief operating officer at AGL Credit Management, an investment advisor dedicated solely to senior secured bank loans with around $12bn of assets under management.

Comer has over 30 years of experience in structured credit markets — from 2009-2019 she worked at Bank of America where her last post was global head of the CLO primary business, leading a team in New York and London to originate, structure, market and syndicate CLOs and other securitized products.

Prior to BofA, Comer spent 14 years in a range of roles at Citigroup, where notably she structured the inaugural tobacco settlement securitization for New York City. 

She spoke with 9fin on some of the challenges facing CLO managers as they tackle rising rates and loan downgrades, as well as increasing consolidation among asset managers in the sector.

1. You made the switch to the buyside in 2019 after over 25 years in sell-side roles including Citigroup and Bank of America. What prompted the move and what has been the biggest change?

I really enjoyed my career on the sell-side — there was always something new to learn, the people are smart, fun and competitive and the work itself has a good range of strategic and tactical decisions. Before AGL, for the last two decades I have been working as a CLO banker, a market which has grown remarkably from under $70bn when I started to over $1trn globally today. I wasn’t looking to move to the buyside but the role at AGL was irresistible. The opportunity to build a best-in-class asset manager from scratch with Peter Gleysteen and work with this team has been very rewarding. I have been able to use many of the skills I learned in banking. The environment here is similar to what I was used to — a team mentality where we are focused on the firm’s success as well as some healthy debates about the best way to get there. A big bonus has been working with many of the friends I made over the years in my new role. The biggest difference has been a broadening of the range of issues and decisions I can make — I work on everything from new strategic directions for the firm to setting up expense policies.

2. We’ve seen several large CLO manager acquisitions recently, with the likes of Blackstone and Carlyle increasing their footprint. Why is the CLO market consolidating, and what do you think the primary impact of this consolidation will be?

Without commenting on existing transactions, we’ve seen across the asset management space that large asset managers have moved to increase their footprint and reflect a view that scale is important for non-specialist firms and larger asset managers can absorb the AUM of existing deals with their existing teams. I think that for the managers who are selling, there are many possible reasons for their decision. One is that the expansion of CLO managers (102 issued in 2014 and 126 issued in 2021) doesn’t reflect the difficulty of executing a CLO. Issuing and managing CLOs is not automatic — it requires a great amount of skill and capital to support the business. As a parent company’s commitment to the business changes, it might make more sense for some managers to sell their business to other asset managers.

In terms of impact, the large franchises will continue to grow as a percentage of the market but I would expect that we see new managers continue to enter the market as well.

3. How attractive is the arbitrage in CLO structures at the moment? Which parts of the cap stack are presenting the biggest challenges?

We have not found the arbitrage attractive year to date and have opted to be patient and wait for better market conditions. As a recovering deal junkie, it has been frustrating to see how busy the market is — YTD is the fastest start to new issue CLOs ever. There are a lot of reasons that managers issue CLOs and it is hard to know all of the inputs (including portfolio price) for deals in the market. In addition, CLOs are not point in time securitizations as managers can continue to improve the portfolios and the structures allow for resetting or refinancing the capital structures. There are arguments to issue but we haven’t found our modelled returns to be compelling enough to enter the market.

AAAs are very attractive relative to where a portfolio of creditworthy loans can be bought. Currently, AAAs are demanding levels of S+180–200bps and based on the historical relationship between single B loans (the typical rating of an asset in a CLO portfolio) and CLO AAAs, we think CLO AAAs should be in the S+160–170bps range. Either the AAA spreads have to go lower, or the price of the underlying portfolio has to be lower for the arbitrage to work. At the recent SFIG Vegas conference, most investors singled out senior CLO debt as the best value, which supports our position not to issue CLO equity at today’s levels.

4. Does the increasing exposure to tech and software in the leveraged loan space pose any concerns, given the downturn in valuations in that sector?

Every credit is different and requires detailed analysis to determine its creditworthiness. Tech and software have become an area of focus given their high levels of leverage. In general, while overall valuations have come off historic highs in software and tech, companies that exhibit high contractually recurring revenues along with high retention rates should still command multiples that more than cover outstanding debt. They are also often backed by sophisticated private equity sponsors with very large equity checks. Per BofA research, tech names have a lower downgrade rate than the broader market.

More than the perceived risk from lower valuations and potential recession related headwinds, the greatest amount of near-term risk probably stems from high base rates, which have compressed interest coverage ratios for single B rated technology companies. This is mitigated to an extent by nearly ~100% variable cost operating structures, which allows borrowers to temporarily reduce sales & marketing along with other expenses to cope with interest obligations, if required.

5. As a CLO manager, how much of a headache are Libor to SOFR amendments? What has the feedback been from your debt and equity investors on this topic, and how does it differ based on their position in the cap stack?

The Libor to SOFR amendment process on the underlying loans has been slower than we expected (since loan repayments or refinancings have slowed so dramatically), but the transition has accelerated recently. AGL’s portfolio is now 30% SOFR and 70% Libor. Our view is that the ARCC CSA is the appropriate compensation for transitioning to a secured base rate from an unsecured base rate. There was a time when some sponsors/banks were trying to push through amendments with zero CSA, and the majority of those were successfully blocked (I note that we have voted no on these zero CSA amendments). In most credit agreements, a majority of lenders must consent (or not object) to the transition, but in a small number of credit agreements, the sponsor and the bank can determine what is the market convention, without requiring lender consent.

On the CLO side, one of the benefits to executing our first CLO in 2019 is the fact that we have had standard LIBOR transition language from our very first deal. As a result, we have not had many of our debt or equity investors ask about LIBOR transition yet, except a few that have asked when we are sending notices for transition. We would expect this to be somewhat of an operational issue as a majority of CLOs and loans switch in the same window (similar to the document logjam of making CLOs Volcker compliant).

6. How concerned are you about interest coverage among leveraged borrowers in a rising rate environment? Is this becoming more of a focus these days?

Rising rates are absolutely a key area of focus right now. In general, B2 and stronger credits can handle higher rates just fine, with the impact being a reduction in discretionary free cash flow. This may slow their pace of debt reduction but generally doesn’t present a credit risk. Some B3 credit profiles, on the other hand, are now operating at breakeven or negative free cash flow which leaves them little room for any potential earnings decline. This makes credit selection more important than ever. We, like the rest of the market, are seeing an increase in CCCs due in part to rising rates but are pleased to remain in the top quartile lowest CCCs.

7. Do you think triple-C buckets will pose a constraint for CLO managers this year? If so, why? And if not, why not?

Generally speaking, we wouldn’t expect a majority of CLOs to fail a coverage test and divert equity payments due to increases in CCCs. For some context, the rating agencies have been more aggressive in downgrading loans — particularly in Q4. In general, the three-month Downgrade to Upgrade ratio has moved from 1:1 in May to 3.3:1 in February. Per BAML, 16% of CLO loans were downgraded in 2022 — with 4% downgraded to CCC.

At AGL, we have recently seen a larger increase in CCC basket, but our OC cushions continue to increase. This is in contrast to the larger market which is seeing OC declines but no change in CCCs — meaning that many managers (who entered Q4 with higher CCC baskets) are selling CCCs and losing par to maintain/limit CCCs. We expect increased manager tiering as managers balance CCC downgrades and OC cushions, and we expect to see some managers — those with higher CCC baskets and less OC cushion — continue to sell higher price CCCs.

Currently the average CCC bucket is 4.5% (S&P) and 4.0% (Moody’s) — giving the “average” CLO plenty of room before breaching the 7.5% limit. However, CCC buckets have increased by 1-1.5 points since September, and pre-COVID vintages are all 5.5% plus on the S&P CCC bucket — meaning lower quartile pre-COVID vintages are very close to or at the 7.5% limit.

Of course, the CCC basket is only half of the equation — the second part is the OC cushion. On average, BSL CLOs have roughly 5 points of OC cushion — meaning that even if CCC’s reach 12.5% and CCC prices are $0.50, the “average” CLO will still have 2.5 points of cushion. Of course there will be some weaker deals and weaker vintages with more friction. Pre-COVID vintages have less OC Cushion (the 2018 vintage has less than 3 points of OC cushion and is almost 5.5% CCC) — meaning those deals may be closer to seeing OC declines.

8. How are CLO managers handling the problem of vehicles exiting reinvestment? And does that create any opportunities?

It’s too soon to say how managers will handle the issue of existing reinvestment in 2023. 40% of US CLOs are expected to exit reinvestment this year, but that headline doesn’t account for the fact that almost all CLOs have the right to reinvest prepayments and sales of credit risk assets, subject to multiple tests. In general, deals outside of their reinvestment period will not be able to buy new primary loans but will be able to buy in the secondary loans for some time.

Most managers are laser focused on this issue and I would expect that if CLO liability spreads tighten, there will be a wave of CLO resets/refinancings to reset the terms (including reinvestment periods) of the CLOs.

9. As a sustaining member of the President’s Council of Cornell Women, what would your advice be for graduates looking to advance in the world of banking and finance?

I have been so lucky in my career in finance and banking — it’s a great place for new graduates to learn a tremendous amount, gain skills and judgement from very experienced people and test that learning with constantly changing market conditions. For people who are curious and like challenges, it is a wonderful place to start your careers and the skills you gain are lifelong assets.

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9Questions — Wynne Comer, AGL Credit Management

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