CLO analyst Joe Mezyk joins The Sherman Show to explain the $750 billion collateralized loan obligation market with DoubleLine’s Jeffrey Sherman and Samuel Lau. Their discussion starts by explaining floating-rate bank loans which form the collateral of CLOs and how the securitization process of a CLO allows the creation of equity and below investment grade obligations as well senior, AAA-rated securities. Mr. Mezyk then describes the risks and advantages of CLOs, the reasons for the growth in the sector’s popularity with investors, the historical default and recovery rates of CLOs (including in the credit crisis of 2008-2009 and the energy-sector downturn in 2015) and how he analyzes CLOs and CLO collateral managers in order to invest in these securities. Among further topics, Mr. Mezyk describes how the CLO market has evolved, more than doubling in size since the credit crisis and the growth of “covenant-lite” loans with their lessened protections for investors to make up 80% of the sector. He also delves into the evolution of the underlying bank loan sector. This episode of The Sherman Show was recorded on September 9, 2019.
