Assessing Collateral Credit Risks in CLOs: The Usefulness and Limitations of WAP

The collateral weighted average price (WAP*) provides a useful snapshot of collateral credit risks. However, this metric has its limitations. First and foremost, WAP could be artificially inflated due to trading. CLO managers may have crystallized portfolio losses by trading out of poorly performing assets. Conversely, some managers may have built up quality par, which…