“In the world of business, the people who are most successful are those who are doing what they love.”
Warren Buffet
We have to give credit to astute CLO-rated debt investors who insisted on adding a LIBOR floor on their floating-rate notes when the US economy was doing well, and interest rates were trending higher. Who would have imagined that the whole US interest rate environment has changed entirely now? While the LIBOR forward rates are all in the positive territories, more headlines of a negative rate environment are seen recently.
Pre-2008 financial crisis CLO equity benefitted tremendously from the addition of generous Libor floors to the underlying collateral assets with each loan amendment. The Libor floors (last two columns of the table below) in the post-2011 collateral pool would help underlying collateral return to some extent, but the focus is still very much on the overall asset performance against the backdrop of wide disparities between managers’ collateral pool performance.
CLO Research estimated that 11.3% of AAA US CLO tranches (excluding class X), in notional terms, do not have Libor floors. Quality deals (top quartile underlying collateral annualised return) with a more extended reinvestment period would be in a stronger position to potentially benefit in a negative rate scenario than deals with poor collateral return coupled with a short reinvestment period.
You shall not license, sublicense, transfer, sell, resell, publish in whole or in part, summarise, reproduce and/or otherwise redistribute the research services or any contents thereof in any manner without the written approval of CLO Research Group.
Disclaimers
The information, research, data, research related opinions, observations and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers, authorised personnel or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research related opinions, observations and estimates contained in this document are in draft form as at the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
