The LFI Levered Lines Podcast Future-Proofing CLO Markets: Trends and Innovations
Feb 11, 2025
Steve Miller chats with Edwin Wilches, Co-Head of PGIM's Securitized Product Team, who brings years of expertise in structured finance managing $130 billion in assets. They dive into the dynamic CLO market, discussing the rise of private credit CLOs and the impact of ETFs. Edwin shares insights on shifting investment strategies, highlighting the importance of simplicity amid innovation. The conversation covers refinancing trends and the implications for investor opportunities and risks, painting a vivid picture of the evolving financial landscape.
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Loan Compression Drives Liability Tightening
- Managers build day-one CLO portfolios from the safest, tightest loans, so underlying loan compression forces liability tightening for deals to work.
- CLO liabilities and loan spreads generally move together; further liability tightening likely needs loan spreads to compress more.
Current CLO Liability And Equity Math
- Typical large-manager CLO math today sees loan spreads in the low 300s and AAA liability spreads in the low 100s, producing a mid-100s weighted cost of capital.
- After fees, that math often yields a roughly 10–12% equity strike zone for managers targeting double-digit returns.
Prepare For Ongoing Resets And Refis
- Expect continued heavy activity in refis and resets, since many CLOs are rolling off non-call periods this year.
- Monitor issuance cadence because sustained refi demand will persist until most of the market has cycled through.