Creditflux Newsletter

Barclays Capital has published a report 'Valuing overcollateralisation tests in CLOs' which points out that in order to judge relative value across cash and synthetic CLO structures, investors must account for three primary differences between the two structures: coverage tests in cash CLOs, prepayment risk in cash CLOs, and sensitivity to defaults.

The bank's structured credit researchers estimate the change in spread that would leave a CLO investor indifferent to the removal of OC tests. They say presence of the test results in a reduction of about 100bp in average equity IRRs from 15.6% to 14.6%. OC tests increase the IRR on the double B liability tranche by about 150bp from 8% to 9.5%. The report says the effect on more senior tranche IRRs is marginal.

Source: Barclays Capital