CLO Leverage Rises To 13x
Sober Look | Jul 22, 2013 02:33AM ET
A new trend has developed in the CLO market. Some of the top managers are now able to place the single-B tranches with investors, thus cutting the size of the equity (unrated) tranche. Since the financial crisis, the lowest rated tranche has been the BB.
That extra layer of single-B takes the leverage (total CLO size over the size of the equity tranche) from 9-10x to 13x. Just as a reference below are a couple of transactions from 2012.
The only way to juice up the projected returns on CLO equity in this low yield environment is to crank up leverage. The leveraged loan market remains quite strong, driven by demand for floating rate paper, low default rates, and lack of M&A activity to bring new supply to the market. As a result, CLO spreads have declined considerably, from L+150 on the AAA tranche in 2012 to L+115 now. The new single-B tranches now price at the spread that the BB tranches used to price in 2012, as investors reach for yield. With this new demand, the 13x leverage becomes possible.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.