Salient to Investors:
Citigroup sees banks getting increasingly involved in collateralized loan obligations for higher returns on capital. CLO issuance has more than tripled in 2012 to a more than five-year high. The U.S. two-year interest-rate swap spread, a measure of debt market stress, touched 8 basis points on Oct. 17, the lowest going back to 1988.
Boaz Weinstein at Saba Capital Mgmt said CLOs are cheap compared with the underlying loans.
Ashish Shah at AllianceBernstein said the corporate market has compressed so much that investors are looking everywhere and are more open to assets like CLOs which represent remaining parts of value in the market.
Adrian Miller at GMP Securities said that in hot markets, bankers push the envelope little by little, introducing either lower credit quality or increasingly esoteric structures to get a sense of the market’s acceptance – there’s still room to go with structured credit.
James Wang at Saba likes debt from older CLOs, which are more stable because they are short-dated and have relatively low volatility compared to the average CLO.
Bryce Markus at BlueMountain said you don’t take on that much more risk to enhance your return – for longer-duration capital these types of assets make a ton of sense. Markus said more and more pension funds embrace that type of investing.
Noel Hebert at Concannon Wealth Mgmt said the move back into structured credit will be tempered by the out-sized losses they left investors with during the crisis four years ago. Hebert said institutional investors won’t soon buy regardless of yield because of career risk – the one unforgivable sin is to get hurt by them again, so it’s hedge funds and more aggressive fund managers that are investing now.
Robert Cohen at DoubleLine Capital said the CLO structures have worked and survived a terrible credit cycle.
JPMorgan said CLO AAAs are one of the cheapest highly-rated assets with negligible credit risk.