The Credit Edge by Bloomberg Intelligence CLOs Stage a Comeback; Shipping’s in Dire Straits
Jul 13, 2023
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How CLOs Work And Why They Matter
- CLOs repackage floating-rate leveraged loans into tranches from AAA to equity, making them a major buyer in the leveraged loan market.
- They historically show low defaults and high recoveries, which supports investor demand despite complexity.
CLO Resets Shift Returns Down The Stack
- Resets extend a CLO's life and reprices bond tranches, shifting yield from bondholders to equity holders.
- Their return suggests improving credit market functioning but reduces payouts for some investors.
Weigh Alternatives Before Rejecting A Reset
- Consider the market alternatives before rejecting a CLO reset because selling may not find comparable yields elsewhere.
- Accepting a lower coupon can be rational if replacement opportunities are scarce.