Tag Archives: Arbitrage

As of February 14, 2025, the latest arbitrage metric for US CLOs was recorded at around 220 bps, an improvement from 212 bps at the beginning of the year.

While asset spreads have tightened, the WACC has also become more competitive.

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.

Asset spreads play a significant role in influencing AAA issuance spreads, though the relationship is not always perfectly linear due to factors such as the demand and supply of AAA notes. This article notes that current top-tier AAA levels, at approximately 124–126 bps, are elevated compared to historical norms.

The absence of CLO arbitrage has been garnering significant attention recently. This concept encompasses several facets, most notably the initial net interest margin of a CLO deal. However, in periods of loan market volatility, the importance of the initial net interest margin diminishes somewhat, as market participants redirect their focus towards the enticing potential rewards associated with the rise in equity NAV.