WWRR Vol.2.015

Christopher Wood christopher.wood@clsa.com +852 2600 8516
Figure 19
Assets under management in collateralised loan obligations (CLOs) and loan funds
700
(US$bn)
Europe CLOs
(US$bn)
180
600
US CLOs
Loan funds (RHS)
170
160
500
150
140
400
130
300
120
110
200
100
90
100
2013 2014 2015 2016 2017 2018
Source: BIS – Quarterly Review: September 2018
80
Figure 20
S&P/LSTA Leveraged Loan Price Index
105
100
95
90
85
80
75
S&P/LSTA Leveraged Loan Price Index
70
65
60
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Source: Bloomberg
If the above is an obvious area of vulnerability in a downturn, it should be noted that a lot of this
financing has taken place outside the banking system in often opaque and complex structures. This
is precisely the area of debt globally GREED & fear would most likely to short along with, of course,
Italian government debt. Meanwhile, “private equity” will undoubtedly be remembered by financial
historians as the chief beneficiary of the quanto easing-driven asset-inflation cycle of the past 10
years which has led to such outsized gains for the few in a period of mostly anaemic growth. This
cycle began in America with private equity firms taking advantage of the housing bust to buy tens of
thousands of single-family homes to rent out, an entirely sensible investment, and has since
morphed into ever more complicated highly leveraged transactions. Sensible private equity groups
would be advised to have already exited the game and turn to markets where there is an obvious
opportunity to “unlock value”, namely Japan. And this indeed is what the smart money has been
doing.
Meanwhile, it is to the great credit of Federal Reserve Chairman Jerome Powell that he has
succeeded in normalising monetary policy to the extent that he has. But there are going to be
casualties of this tightening cycle, as indeed there always are.
Thursday, 22 November 2018 Page 10