Structured Credit

We believe the surprise Trump victory will result in a period of volatility that may last for some time. Similar to the Brexit surprise, it will take time to digest the long-term impacts of a Trump presidency.

On the one hand, tax cuts and fiscal stimulus spending plans could bolster economic growth, helping to further extend the credit cycle, which would be a positive for the underlying loan collateral composing CLOs. Regulations also could be rolled back including some of the regulations which we’ve seen implemented in the wake of the financial crisis of ’08 / ’09.

On the other hand, more volatility in capital markets will likely reduce buyer demand for CLOs in the short-term and may also lead to lower issuance.

Fortunately, our democracy is set up in such a way that changes don’t tend to happen quickly and often take months or years to be implemented. This will likely be the case with reforms being pushed through by a Trump administration, in our opinion. If we do encounter a period of increased volatility related to the change in administration, we expect that we could see opportunities emerge in the secondary market for CLOs. The European market was insulated from the weakness seen in the U.S. market in early 2016 partly due to the lack of energy exposure in the region and partly as a result of a strong technical picture, including a dearth of new CLO supply. We would anticipate that Europe could again prove somewhat of a safe harbor in such a scenario.

Ultimately, CLOs are structured to handle volatility and they benefit from a lack of mark-to-market triggers. What drives performance in CLOs over the long term is the how the underlying loan collateral performs. With fundamentals still healthy in the senior secured loan market, in our opinion, we will likely view any periods of volatility associated with the political change as potential opportunities.

Matt Natcharian

Head of Structured Credit

Market Insights