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Private Credit 

Dan Alderson

You know what a miracle is. Not what Bakunin said. But another world’s intrusion into this one. Most of the time we coexist peacefully, but when we do touch there’s cataclysm…

Having been on holiday last week, I’m catching up with the Altice party. The island of Samothraki has plenty of goats, cats and waterfalls, but not much 4G.

If you also need a fast connection to what happened with Altice, check out 9fin’s coverage here, here and here. But in essence the global telco’s bonds and loans tanked after co-CEO Alexandre Fonseca suspended himself over a corruption investigation in the Portuguese arm of the business.

As an avid watcher of CDS, my little heart leapt at the prospect of two iTraxx Crossover index entities going digital over these developments. But the slightly more mature response was to think about what it means for the CLO market — not just in the immediate sense of exposure but also conceptually.

(Humour me though to tell you Altice Finco (an Altice International subsidiary) five-year CDS dialled 13 points wider to 40.25 points up front between last Monday and last Wednesday (17-19 July), according to IHS Markit, while Altice France widened 5.75 points to 24.25 PUF. Both eased back on substantial rallies by Friday, to 33.75 PUF and 21.5 PUF respectively, and further today (24 July), making this a wonderful spot of volatility for synthetic geeks like me).

Back to analog. The CLO market is well versed in sporadic defaults and single name distress impacting only a handful of portfolios. When that happens, usually you find most managers have long since hung up on the offending article and so only a thin crew of more risk-tolerant, or opportunistic, managers will still be on the line.

As Deutsche Bank noted on Friday in its Asset Backed Barometer research, Altice (across the Altice International and France complex) is the single-largest obligor holding for European CLOs at €4bn held in total, through 59 managers spanning 511 deals. The US CLO market holds $6.2bn of dollar denominated Altice leveraged finance exposure.

Talk about seeing a new meaning in the Altice tagline, “Together Has No Limits”.

There’s a bit more to drill down into with those numbers, which I’ll get to below. But let’s just say this is awkward, especially as the European CLO primary market has just cranked back into life, with Nassau Euro CLO III having priced on Tuesday.

For an asset class that is more often a forced buyer than a forced seller, Altice is a call to action on self-examination rather than indiscriminate asset unburdening. It’s also fuel to the fire here at 9fin, where we are working hard to build out a CLO database that will help shine a bright torch on such matters. What we all need is a heat map of how managers overlap on other big loan holdings… (I’m looking at one of my newer 9fin colleagues in particular for this).

It will be interesting to see what comes out in the wash in the next round of trustee reports. As much as there has been selling of Altice in the secondary market, there has also been enough doubt in the situation for opportunists to pounce on cheap paper. (Being the CDS advocate in the chat, it behooves me to point out those five-year moves already tell the story)

Such clamour is short-lived, whereas the learning should be longer. There is plenty left to say on what an Altice default, Sauvegarde or restructuring would mean for holders of the different paper at the different entities, so there’s plenty more trading ahead. But for CLO guys, the questions run much deeper.

Clearly there’s a problem of concentration, raising questions over how diversified and different any CLO can claim to be if they always compete to buy the same stuff as everyone else. The interconnectedness of things becomes apparent in a moment like this, both from the perspective of the asset class and the potential for a domino effect across an industry sector.

It feels lazy to term Altice a ’Black Swan moment’, although ChatGPS was confident that was the most relevant literary work to reference in this week’s Macro Prophet. I was also reticent about drawing allusions with the world destroying Ice-9 chain (Altice-9?) reaction in Kurt Vonnegut’s Cat’s Cradle, even though it feels like something 9fin readers would want to know about... One does have to wonder though when it becomes pertinent to draw a causal link between all these individual mishaps — Silicon Valley Bank, Credit Suisse, Casino Groupe… the UK…

Instead, the line I quoted comes from Thomas Pynchon’s “The Crying of Lot 49", a novel in which the telephone is a prominent motif and the protagonist becomes entangled in a complex and mysterious conspiracy. Oedipa Maas finds herself in a world where communication is often fragmented, confusing, and filled with conflicting messages.

Altice should beckon CLO investors to go on a search for meaning and truth, because whether or not it becomes part of a broader contagion effect within the market it foreshadows work that will become increasingly important on other companies as the credit cycle turns. We could be at the start of a long, strange journey through the night.

Defaults are widely predicted to ratchet up, and it’s likely more and more will feature prominently in structured credit portfolios. Greater scrutiny is due on manager selectivity, due diligence, risk management and stress testing, so don’t let this education go to W.A.S.T.E. (Just read the book ok? It’s great).

What does Altice tell us about that? As DB points out, the weighted average current price of Euro CLO holdings across a total of 19 Altice Group instruments is 76.4, down from 84 at the start of the year.

“Meanwhile,” add the strategists, “a Euro loan launched in just February of this year at an issue price of 98 now trades in a mid-80s context.” (This refers to an amend and extend the company conducted on its term loan B).

Seven loans and 11 fixed rate bonds make up the instruments Euro CLOs hold (see the DB table I included above). Within this universe, there’s a dizzying array of prices with the lowest bond priced at 37, but the next two highest are 45 and 55. One portfolio exposure to Altice could thus be rather different to another, especially as some debt is at OpCo and others at HoldCo level.

According to DB, manager exposures are as high as 3.4%. The bank also investigated aggregate manager exposure to the three lowest priced instruments (HoldCo SUNs) and found Permira tallied 1.8% for a nominal €48m, while Axa had 1%, or a nominal €27m. having the most prominent exposures to these instruments.

“On a deal basis PRVD 3X, PRVD 6X and PRVD 5X have the highest combined exposure to these three names,” adds DB.

While painful for some managers and investors, Altice might prove a timely wake-up call that is big enough for everyone to take notice of — but not so cataclysmic it wrecks the whole project. Maybe not the ‘miracle’ anyone would want, except from an anarchistic point of view, but CLO investors might look back on this clash of worlds as having averted a bigger, broader mishap.

As another European bank, BNP Paribas, phrased its second half 2023 outlook, CLOs present a picture of “strong technicals combined with weaker fundamentals”. To my mind, Altice’s prevalence in existing portfolios pretty much exemplifies that combination, but BNP Paribas is thinking more about decompression in the CLO capital stack with a challenging picture for deal equity.

Strategists see IG tranches outperforming more junior (BB/B) tranches, and within that upper bracket AAA/AA doing better than A/BBBs.

“The strong technical backdrop has been the main reason behind CLO spread tightening this year,” wrote BNPP. “Technicals have been supportive as a result of: (1) the slow activity on the primary side (due to the challenging arbitrage conditions) and (2) the attractive relative value of CLOs (and other ABS products) within broader credit markets. We expect such supportive conditions to remain in place for the rest of the year.”

BNPP has revised its 2023 CLO New Issue volume projections to $95bn in the US and €20bn in Europe.

“Refi/reset activity could pick up towards the end of the year, driven by the refinancing of some 2022 deals (AAA tranches mainly) exiting their non-call period,” the strategists add. “Our refi/reset volume projections are $10bn in the US and €2bn in Europe.”

As for me, I was oblivious to all these discussions in Greece (the powerhouse of Europe these days, if you believe the financial press — hint, your average Greek doesn’t). But I wasn’t entirely spared from concentration risk or mystery.

On day one of our stay on the island, a trusting feline sneaked into the house and we were surprised to find ourselves managing this cat-lerised kitten obligation… A small but strangely diversified portfolio (the bigger tabby being particularly suspicious) and thankfully no defaults as of the last report.

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