Panagram targets AAA-rated CLOs with second active ETF

Jul 27th, 2023 | By | Category: Fixed Income

Panagram Structured Asset Management, a subsidiary of Eldridge, has unveiled its second ETF, an actively managed fund targeting high-quality collateralized loan obligations (CLOs).

John Kim, CEO of Panagram

John Kim, CEO of Panagram Structured Asset Management.

The Panagram AAA CLO ETF (CLOX US) has been listed on NYSE Arca with an expense ratio of 0.20%.

CLOs are debt securities issued in different tranches by a trust or other special purpose vehicle and backed by an underlying portfolio consisting typically of below-investment-grade corporate loans.

The underlying loans, which are selected by a CLO’s manager, typically may include domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans.

Although the underlying loans are rated below investment grade, most CLO tranches are typically rated investment grade because they benefit from diversification, credit enhancements, and subordination of cash flows.

AAA-rated CLOs have a first priority on the interest and principal from the underlying pools of senior secured loans. By investing in this tranche, investors can gain access to a diverse pool of bonds which, collectively, may offer higher yields than other AAA-rated investments.

CLOs have historically been available only to institutional investors and were only packaged within the ETF wrapper for the first time in 2020. Despite some initial skepticism, investor interest in CLOs has been robust due to inherent benefits such as low volatility, low downgrade risk, and low correlations with traditional fixed income assets.

Additionally, the loans underlying CLOs are also almost exclusively floating-rate in nature which has proven popular with investors amid rapidly increasing interest rates.

Despite growing to $1 trillion in size, the CLO market is relatively complicated, strengthening the argument for an active approach to the sector. Panagram, which is a $14.7 billion credit asset manager, has extensive experience in originating, structuring, monitoring, and investing in the CLO market and currently oversees one of the largest portfolios in the space.

In managing the ETF, Panagram prioritizes capital preservation by investing in AAA-rated CLOs, a sector of the corporate credit market that has a long-standing, robust historical track record with no AAA-rated bond defaults in over 25 years.

The ETF targets CLOs with minimum initial total offering sizes of at least $250 million. While the fund will primarily target AAA-rated CLOs, up to 20% of its portfolio may be allocated to CLOs rated AA or A in a search for higher yields. The fund has no limitations in terms of maturity and duration.

Panagram applies a bottom-up approach that reviews the current market environment for potential investment opportunities, including newly issued and secondary market CLOs. The firm monitors the ETF’s portfolio on a daily basis to proactively position investments for changing market conditions.

John Kim, CEO of Panagram Structured Asset Management, commented: “At Panagram, we have established ourselves as investment specialists in the CLO space, and the launch of CLOX reflects our commitment to providing investors with attractive investment opportunities. CLOX is designed to be a capital preservation vehicle, offering investors the potential for consistent monthly income and limited downside risk.”

Panagram made its ETF debut in January with the launch of the Panagram BBB-B CLO ETF (CLOZ US), another actively managed fund targeting lower-rated CLOs. CLOZ currently houses $80 million in assets and has an expense ratio of 0.50%.

Both ETFs make distributions to investors on a monthly basis.

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