Morgan Stanley alters CLO AAA outlook

Morgan Stanley analysts changed their view on CLO triple As, arguing that re-financing opportunities for leveraged loans have deteriorated to unexpected levels over the past five months. Their rationale is as follows.

First, CLO triple As must be re-priced in the low 60s dollar price levels in order to be competitive with other asset classes. Their current spread levels (libor+650bp) and single-digit yields do not offer returns comparable to other structured assets.

Second, with existing lenders having to contribute to debtor-in-possession financing in restructurings, CLOs are disadvantaged where CLO managers are limited in their ability to invest in DIP loans within their CLO portfolios. Furthermore, the rise in the ‘priming' of liens are weakening the claims of pre-petition creditors.

Finally, negative basis buyers of CLO triple As are disadvantaged by monolines that are considering different ways to restructure. In the case of MBIA, whose public finance and structured finance businesses were split, the structured finance unit was worse off.