US BSL CLOs: Weekly Arbitrage Metrics and AAA Spreads
As of March 21, 2025, the latest arbitrage metric for US CLOs was recorded at around 223 bps, an improvement from 212 bps at the beginning of the year.
As of March 21, 2025, the latest arbitrage metric for US CLOs was recorded at around 223 bps, an improvement from 212 bps at the beginning of the year.
Last week experienced a marked widening in both asset and CLO liability spreads. However, as of 14 March, the arbitrage remained largely stable week on week, with asset spreads (4-week average) and CLO WACC increasing in tandem by approximately 5 bps.
As shown in the table below, 2018 and 2021 vintage deals have a tight WACC, which is typically an attractive feature for equity investors—after all, who wouldn’t want to lock in a long-term, low cost of funding?
As of 7 March 2025, the latest arbitrage metric stood at 233 bps. The loan index’s four-week moving average of discounted spreads has tightened by 30 bps since the beginning of the year, while the top-tier WACC print has also tightened, albeit by a smaller margin of 22 bps over the same period.
The loan index's moving 4-week average discounted spreads are used as a proxy for the discounted spreads of US BSL CLO portfolios. On average, seasoned US BSL CLO managers have closely tracked the return performance of this loan index across all three metrics: annualized total returns, MV returns, and interest returns.
The loan index’s moving 4-week average discounted spreads are used as a proxy for the discounted spreads of US BSL CLO portfolios. If the index prices fell below 96, 4-year discounted asset spreads were used instead of spreads to maturity. Arbitrage refers to the index’s discounted spread net of the cost of funding, based on discount margins (of AAA–BB tranches of top-tier deals) rather than spreads. New issue upfront costs and management fees are not accounted for. The loan index used for this analysis is the Morningstar LSTA US B-BB Ratings Loan Index.
