The Newest CLO Firm Is Ready If Crisis Comes to Credit Markets

(Bloomberg) -- Yvonne Stevens and Lynn Hopton have worked together in the risky-loan business since the early 1990s when the investment type was barely known. They’ve assembled a lot of deals, maneuvering through the 2008 crisis and a smaller downturn a few years later.

Now, there are signs of trouble again. Investors hungry for high-yielding bets have poured $600 billion into deals that package loans for lower-rated companies, double the size of the market in 2008. The frenzy has pushed debt sales to record levels and led to deteriorating terms in loan documents. Regulatory alarms are ringing.

So what do Stevens, 55, and Hopton, 59, plan to do now? Double down. They left Columbia Management last year, where they’ve done leveraged-debt deals for the last 18 years, to go out on their own. Their new firm will issue and manage collateralized loan obligations, the hot Wall Street security that bundles the risky loans into bonds designed to be safer.

The move may seem ill-timed to the outside observer, but as the two women view it, this is a great moment to set up a new CLO shop. If bad times come, they can snatch up discounted loans that are probably worth more than their trading price. There are risks, but with them comes the opportunity for fatter rewards as the loans recover.

“We know we’re going to be managing these assets through a credit cycle by definition,” Stevens said in an interview. “There are bad things that happen in a credit cycle but there are also opportunities. We appreciate the volatility.”

Rival Firms

Stevens and Hopton aren’t alone in this assessment. They join a host of companies, from insurance managers to hedge funds, beefing up their CLO offerings recently. Thomas H. Lee of Lee Equity Partners and Peter Gleysteen, founder of CIFC, launched a venture to issue CLOs in March. LibreMax Capital agreed to buy a CLO firm in November while Elliott Management Corp. threw its backing behind Elmwood Asset Management, an issuer of CLOs that was set up last year. Hedge fund manager Whitebox Advisors LLC is also expanding in CLOs.

While the threat of recession -- and the risk of defaults -- remain ever-present, the global hunt for higher yield, created by years of suppressed interest rates, is feeding the activity, according to John Timperio, a partner at law firm Dechert LLP, which represents some 45 CLO asset managers.

“It continues unabated,” he said of firms’ expansion moves. “The drivers are the pressure to put money to work, combined with a perception that the longer you wait the more challenging getting deals done will be. You don’t want to be a new manager right in the middle of a downturn.”

Birth Timing

Stevens and Hopton met while working on loans and other structured products in 1993 at SunAmerica, the Los Angeles-based annuity seller founded by entrepreneur Eli Broad. They struck up a friendship, attended each other’s weddings, and even talked, half-seriously, about staggering the births of the five children they have between them so they wouldn’t be gone at the same time.

They moved to Columbia, where they established and led the money manager’s CLO and leveraged loan program, from 2000 to early 2018. By the time they left, eager to undertake more deals than Columbia was committed to finance, they had churned out 22 deals of $12 billion. They entered the financial crisis managing about $9 billion.

Recession Impact

The CLO market emerged largely unscathed from the recession. That’s because the securities were filled with corporate loans, which performed a bit better than the disastrous subprime mortgages that helped produce the crisis. CLOs also offer additional protection for investors in that managers actively trade in and out of the loans, which helps them avoid losses.

Hopton and Stevens hope in their first two years to amass assets of about $2 billion to $2.5 billion for their firm, called HalseyPoint Asset Management, based in El Segundo, California. A-CAP, which owns insurance and financial businesses, is an investor and the two women have put in their own money. They plan to sell their first CLO in the fourth quarter.

The firm’s recent hires include Lee-Mike Zapata, who joins as head trader from JPMorgan Chase & Co. where he spent 10 years trading leveraged loans, high yield and distressed debt.

For Stevens, HalseyPoint completes a circle or sorts. The first deal that landed on her SunAmerica desk, in the summer of 1993 when she was not long out of college (Wharton), was a CLO package.

“I always thought of that as being a little bit of fate that I worked on that at first,” Stevens said. “We’ve devoted our careers to this asset class.”

To contact the reporter on this story: Sally Bakewell in New York at sbakewell1@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;David Papadopoulos at papadopoulos@bloomberg.net, Larry Reibstein, Dan Wilchins

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