Seneca Sees Pension Fund Interest In CLOs

Pension funds are starting to consider investing in collateralized loan obligations (CLOs) to improve returns from their fixed-income portfolios, according to Samuel Austin, senior portfolio manager with Seneca Capital Management.

Pension funds are starting to consider investing in collateralized loan obligations (CLOs) to improve returns from their fixed-income portfolios, according to Samuel Austin, senior portfolio manager with Seneca Capital Management. While a dozen or so pension funds have used CLOs and structured debt for over a decade, this is the first year he’s seen a groundswell of interest from U.S. plans. Seneca last month closed its first collateralized loan obligation--a $300 million deal called Nob Hill CLO. Three public pension plans, which he declined to name, invested a total of $17 million, which made up two-thirds of the $24.5 million equity tranche. This was Seneca’s seventh structured debt transaction and the firm expects to launch additional CLOs. Austin said he approached 10 pension plans about Nob Hill and Seneca has spent a lot of time educating prospects. An allocation to CLOs can boost returns without having much impact on risk, seeing as CLOs would typically make up a small part of a plan’s fixed-income portfolio. In a low return environment, “people are realizing that fixed-income is not the asset class many of us remember as the quiet sleepy forgotten portion of the portfolio,” he added. Nob Hill’s internal rate of return should be 13-15% after fees.

Another CLO manager said this year for the first time U.S. public pension plans have requested meetings with his firm. “It’s a relatively new phenomenon,” he said, driven by a search for yield and the paltry outlook for public equity markets. Austin said several consultants have requested information and meetings with Seneca. The $100 billion Teacher Retirement System of Texas holds approximately $50 million in CLO equity as part of its fixed-income portfolio, to gain access to the bank loan market, said Juliana Helton, spokeswoman.

Nob Hill’s portfolio mainly consists of senior secured bank loans, which deliver floating rate returns and this is attractive in a volatile interest rate environment. As the loans are senior on companies’ balance sheets, if default rate pick up investors are more likely to recover their assets.

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