Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6
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Hello, everyone. Before you listen to this excellent fireside chat with a structured credit expert, I have some rather big news for forward guidance listeners. This will actually be one of the final forward guidance episodes that I'll be hosting. The extremely talented Felix Javeen will be taking over forward guidance very shortly, and I'll be leaving to host a new podcast called Monetary Matters. You can subscribe to the Monetary Matters YouTube channel right here, and the Monetary Matters podcast channel will be set up very shortly. And, of course, you can stay up to date with my work by fol
you very much. It's great to be here.
It's great to to be with you. Can you explain for our audience what is a collateralized loan obligation? It
it goes back to the history of securitization. But, ultimately, the goal of a CLO or any other type of securitization, was to free up bank balance sheet. It was an ability to, enhance, back in the early eighties, you know, enhance homeownership 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
Thank you, Leila. And just to to frame our conversation, so, CLOs have been in a bull market over the past few years for a variety of reasons that we'll get into, and much of the CLO world has rallied tremendously. And just from reading your work, I think you think what we're facing may be a time where there could be some outperformance for more CLOs. Some do better than others, and there's a there's a chance for, you know, CLO managers and investors to choose wisely as the the credit cycle evolves. But just to wind back, people, when they hear c blank o, a CDO, a CMOSCLO, I think some people
has to do with 2 fold. First of all, we have a a a very simple saying, garbage in, garbage out. So that's the case of what happened in ABS CDOs. What we found was subprime because subprime mortgages were originated. There was no real mortgage regulation. You had people that lied, so hence the term liar loans, you know, became prevalent. And when you have mortgages where you think that the you know, again, it 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
Thank you. And so, yeah, both CDOs and CLOs, they issue liabilities to investors, and the the assets are are they owned collateral. In the case of CEOs or mortgage backed securities, it's sub subpart mortgages. In the case of CLOs, it's it's corporate loans. So you have that that that balance and the structure. And then the 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 so the fundamental difference, is business loans to companies are a much higher credits than mortgages to people who are, you
were it's known as market value CDOs. I think that you're referring to market value CDOs, and that's that what indeed was it was meant to be actually a a protection. That was why it was, you know, instituted. Unfortunately, the market moved too fast. So a lot of the market value deals blew through their, their triggers, and it became a kind of a negative situation. You were chasing the market down, and, therefore, it didn't actually end up acting as a
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