This theoretical exercise of understanding the floor highlights the vast amount of credit support in the 2.0 EU CLO structure post-GFC.
The median CLO MVOC would roughly get to around par at the AAA level even if loan prices were to get to around 60 areas (GFC scenario). In other words, the median 2.0 CLO AAA tranches are still largely covered by the market value of the underlying loan collateral! That was not the case at all back in the time of the 1.0 CLO AAAs. Besides, 2.0 CLO deals have much tighter WAL and legal maturity date tests.
Of course, the loan market eventually recovered, and the rest is history. That said, the post-GFC additional credit enhancement stays, instead of reverting to the 1.0 CLO structure.
Some thoughts:
Despite solid credit enhancement at the AAA levels, manager selection is still very important. The reason is: the dispersion of performance will be much more profound in times of volatility, and deals with better relative performance would still suffer from MTM volatility but to a lesser extent. Less MTM volatility might translate to better liquidity in relative terms and more optionality available to take advantage of any market dislocations.
Loan prices do move down together but that does not necessarily mean higher default clusters across the board. There are always winners and losers in almost every industry.
Related articles:
CLO Research Coverage: Individual Manager Investment Performance Report
How Does CLO Securitisation Work?
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