The Credit Edge by Bloomberg Intelligence Tetragon Sees Midteens Gain in Riskiest CLO Tranche
Aug 21, 2025
Dagmara Michalczuk, co-chief investment officer at Tetragon Credit Partners, specializes in the high-risk CLO market. She discusses expectations for collateralized loan obligation equity to yield up to 15% this year, emphasizing the benefits of diversification and leveraging financial engineering. Dagmara highlights risks related to loan defaults and liability-management exercises, as well as the shifting investment dynamics between U.S. and European CLOs. Her insights underscore the growing interest in this asset class amidst economic uncertainties.
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CLO Structure Has Proven Resilience
- CLOs have proven resilient across very different environments due to active management, non-mark-to-market financing, and diversification.
- That resilience does not eliminate mistakes: ~14% of realized deals returned below 0% IRR historically.
Actively Manage Liability Costs
- Adjust the financing side to protect equity returns by actively refinancing and reducing funding costs.
- Use tactical sourcing: buy assets in dislocations and finance once spreads normalize to enhance returns.
Lean Toward Liquidity And Quality
- Avoid concentrated exposure to second liens, unsecured bonds, and smaller companies inside CLO portfolios.
- Prioritize highly diversified, higher-quality, and liquid portfolios as a risk-mitigation and volatility monetization tool.