CLO value has shifted to the middle, says BofA Merrill

Given recent price falls, CLO mezzanine is now at least as good value as senior and equity, according to a report published this week by Bank of America Merrill Lynch. In Global CLO Weekly, the bank changes its recommendation from buying the "barbell" of equity and senior, in favour of a flatter view of the capital stack.

Mezzanine has born the brunt of recent CLO price falls, write the researchers, with double B spreads on a discount to maturity basis having risen from as low as 800 basis points to around 1400bp since April. While DMs on other debt tranches have also risen substantially, triple A spreads have remained relatively stable at just over 200bp.

The low coupons on most CLO mezzanine mean that the product is for the most part an option on recovery of principal. Lower loan prices mean that the value of this principal option has collapsed, according to the report. Furthermore, tough times for hedge funds, the biggest players in mezz, have led to poor technicals for the asset class. The price of equity has held up better because of its large distributions.

If loan prices pick up again, mezzanine has a larger upside than equity or seniors, says the bank.