Cloud 9fin Tranche Talk — More tailwinds than headwinds for CLOs in 2025
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Dec 18, 2024 Pratik Gupta, Head of CLO and RMBS research at Bank of America, shares insights on the thriving CLO market. He highlights the record-breaking performance of CLO BBs and AAA markets, with returns soaring since 2022. Gupta discusses the rising appeal of AAA CLOs among investors, strategic shifts by U.S. banks, and the influence of Japanese buyers. He also delves into the complexities of Loan Market Exchange structures and how CLO managers can navigate the evolving landscape of 2025. Expect more growth and strategic depth ahead!
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Attractive Yields in CLO BBs
- Both CLO AAAs and BBs are expected to outperform, especially BBs due to their double-digit yields.
- CLO BB yields are comparable to the riskiest high-yield bonds, despite historically lower impairment rates.
CLO AAA as Cash Surrogate
- CLO AAAs are attractive due to their high carry returns and unique position as a floating-rate bond available at scale.
- This makes them a cash surrogate, leading to increased adoption by ETFs.
Banks Increasingly Adopt CLO AAAs
- Regional and medium-sized banks are increasingly adopting CLO AAAs, especially in loan format for regulatory reasons.
- This allows them to show loan growth and benefit from CLOs being the only asset class with mark-to-market gains.