- What does MJX specialize in?
- Why choose MJX?
- What are CDO’s?
- How large is the Leveraged Loans market?
- What is relative value?
- Attributes of Leveraged Loan Asset Class?
|
| What does
MJX specialize in? |
| We specialize in leveraged loan
products, with a focus on collateralized debt obligations. Our
portfolios consist of approximately 90% leveraged loans and
10% high yield bonds. |
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| 2. Why choose
MJX? |
| For over a decade, MJX has employed
a successful investment process with uncompromising discipline.
MJX-managed funds provide investors access to a highly experienced
and successful team in a complex and credit-intensive market.
Our monthly investor letters and conference
calls assure transparency of performance, which reflects our
strong sense of accountability towards our investors. |
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| 3. What are
CDO’s? |
| Collateralized
debt obligations are securitized interests in pools of—generally
non-mortgage—assets. Assets—called collateral —usually
comprise loans or debt instruments. A CDO may be called a collateralized
loan obligation (CLO) or collateralized
bond obligation (CBO) if it holds loans or bonds,
respectively. Investors bear the credit risk of the collateral.
Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics.
Tranches are categorized as senior, mezzanine, and subordinated/equity,
according to their degree of credit risk. If there are defaults
or the CDO's collateral otherwise under performs, scheduled
payments to senior tranches take precedence over those of mezzanine
tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. Senior
and mezzanine tranches are typically rated, with the former
receiving ratings of A to AAA and the latter receiving ratings
of B to BBB. The ratings reflect both the credit quality of
underlying collateral as well as how much protection a given
tranche is afforded by tranches that are subordinate to it. |
| A CDO has a sponsoring organization,
which establishes a special purpose vehicle to hold collateral
and issue securities. Expenses associated with running the special
purpose vehicle are subtracted from cash flows to investors. |
| For someone who is new to CDOs,
the instruments can seem difficult to understand. This is because
there are actually a variety of different instruments that are
all lumped together under the moniker "CDO." Some
of the different structures are detailed below. |
| One important distinction is
that between static and managed deals. With the former, collateral
is fixed through the life of the CDO. Investors can assess the
various tranches of the CDO with full knowledge of what the
collateral will be. The primary risk they face is credit risk.
With a managed CDO, a portfolio manager like MJX is appointed
to actively manage the collateral of the CDO. The life of a
managed deal can be divided into three phases: |
- Ramp-up, during which the portfolio manager initially
invests the proceeds from sales of the CDO's securities.
- The reinvestment period lasts five or more years. The
manager actively manages the CDO's collateral, reinvesting
cash flows as well as buying and selling assets.
- In the final period, collateral matures or is sold. Investors
are paid off.
|
| At the time they purchase the
CDO's securities, investors in a managed deal do not know what
specific assets the CDO will invest in, and those assets will
change over time. All investors know is the identity of the
portfolio manger and the investment guidelines that he will
work under. Accordingly, investors in managed CDOs face both
credit risk as well as the risk of poor management. Investors
have the added burden of paying portfolio management fees. |
| CDOs can be structured as cash
flow or market-value
deals. In flow deal, cash from collateral are used to pay principal
and interest to investors. If such cash flows prove inadequate,
principal and interest is paid to tranches according to seniority.
At any point in time, all immediate obligations to a given tranche
are met before any payments are made to less senior tranches.
|
| With a market value deal, principal
and interest payments to investors come from both collateral
cash flows as well as sales of collateral. Payments to tranches
are not contingent on the adequacy of the collateral's cash
flows, but rather the adequacy of its market value. Should the
market value of collateral drop below a certain level; payments
are suspended to the equity tranche and more senior tranches
may be impacted if performance continues to deteriorate. |
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| 4.
How large is the Leveraged Loans market? |
| Leveraged loans are the largest
source of high-yield paper with new-issue volume of approximately $425 billion
for the 12 months ending in December, 2007, according to S&P
LCD. |
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| 5.
What is relative value? |
| The Relative Value approach
seeks to benefit from the historic long-term performance of
the “value” style of investing, while minimizing
the opportunity cost associated with the market's inevitable
style rotation between value and growth. To this end, a systematic
and disciplined review of current market value returns of each
investment is compared to similarly risk-rated issuers to reduce
exposure to the lowest return and reinvest in higher return
issuers of the same or lower risk. We apply Relative Value style
across three levels of risk/return: relative value of industry,
relative value of issuers within an industry and relative value
of issue for each issuer. |
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| 6.
Attributes of Leveraged Loan Asset Class? |
The leveraged loan market is
comparable to the high-yield bond
market from an issuer credit rating perspective and leverage
perspective. A loan can be classified as leveraged if it generally
meets any of the following criteria: debt ratings of below Baa3/BBB-
from Moody’s and S&P, a debt-to-EBITDA ratio of 3.0
times or greater, or pricing of at least 125bp over LIBOR at
issue. General attributes of Leveraged loans include: |
- Leveraged loans have a floating interest rate.
- Leveraged loans generally mature in five to eight years.
- Leveraged loans are callable.
- The covenant packages of leveraged loans afford lenders
some
control over a credit.
- Leveraged loans are usually rated by Moody’s and
S&P.
- Leveraged loans are usually secured by the assets of
the issuer.
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