The CLO: Diversity Within One Instrument
A lot has been written about different mechanisms that are coming out on the revitalized financials market, like the ILO, or Initial License Offering. Yet the return of the CLO or the collaterialized loan offering as a popular investment type trumps most of the other news due to its ability to attract and pull happier investors into financing mainstream companies.
A long history of satisfied customers:
When James Dondero and David Okada started making tweaks to loan offerings a couple of decades ago, clients were intrigued because they were soon able to look at strengthening their position as lenders while the company that they were investing received the benefit of more financial groups interested in getting involved in their work. The team moved out to their own firm, Highland Capital Management, and built more and more sophisticated models, eventually allowing clients to pull from a wide range of investor types in one offering.
Today, James Dondero is recognized as one of the best people in the world to structure a CLO for clients in different financial situations. His ability to understand what the investor wants to see prior to creating the different layers of the CLO allows him to tailor larger investments for his clients across a wide variety of industries. This allows Highland to specialize in oil and gas and several other industries like retail, without too much overhead. The net result over the past 15 years has been portfolio growth that is now around 20 billion dollars.
A CLO that is written by Mr. Dondero or Highland Capital Management is likely to be one that offers a variety of incentives for investors. Not only do they have the option of looking for either a high or low rate of interest within the same vehicle, they also are able to look for repayment terms that are either more lenient, or more stringent. Typically speaking, in a CLO, the investor that gets the best position in terms of repayment, also increases their risk with regard to the overall investment in case the company that is invested in has trouble paying the loan back.
In theory, the CLO, with its long history should be a pretty stable instrument for people to get involved with. There is only one time in its history over the past 15 years that it did experience problems in the market. That was when the recession occurred and caused a lot of pain overall on Wall St. Investors punished some of the financial tools like the CLO, even though there was not really a correlation between performance and the recession. As a result, the Highland Capital Management portfolio, which shrank like other funds during the recession, is back to its pre-recession value and more. Which is another way of saying that those that waited through the recession were sometimes rewarded when a fund recovered.
Since the CLO has been global again for the past few years, James Dondero and company are ready to write more and seem to be well-positioned to take their fund forward for another couple of decades.