Tag Archives: Arbitrage

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.

The loan index’s moving 4-week average discounted spreads are used as a proxy for the EU CLO portfolios’ discounted spreads. Arbitrage refers to the index’s discounted spread net of the cost of funding, based on discount margins (of AAA–B tranches) rather than spreads. Upfront costs and management fees are not accounted for. The loan index used for this analysis is the Morningstar Euro-denominated Leveraged 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.

Graph: US and EU Arb Based on Discounted Loan Spreads and CLO DM Arb (US) is calculated by taking the...

US CLOs: Quarterly Average Discounted Loan Spread-to-Maturity Less Weighted Average DM in Graph The graph above shows the US CLO arb picture...