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Structured
CLOs-squared face EOD risk
In its most recent Global structured credit strategy research report, Citi says that CLOs that invested in other CLOs could suffer a significant drop in overcollateralization ratios, and could even suffer events of default. The report notes that as of now there is no immediate risk of events of default for CLOs with exposure to other CLOs, but that deals with high exposure to double B and triple B tranches could face a severe drop in their overcollateralisation levels. This could potentially cut of junior tranches.
US CLOs with significant exposure to other CLO tranches
|
Deal |
Manager |
Exposure to CLO tranches (%) |
|---|---|---|
|
Bryant Park CLO |
Blackstone |
13.7 |
|
Comstock CLO |
Silvermine |
8.7 |
|
Brentwood CLO |
Highland |
7.3 |
|
Gleneagles CLO |
Highland |
7.2 |
|
KKR CLO 2006-1 |
KKR |
7.1 |
Source: Citi
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Trading
Issuers
CFlux secondary
CLO index levels:
| Index | 21 May |
|
| CFlux USD AAA | ↑ | 96.2 |
| CFlux USD AA | ↑ |
88.3 |
| CFlux USD A | ↓ | 84.1 |
| CFlux USD BBB | ↓ | 75.3 |
| CFlux USD BB | ↓ |
74.1 |
| CFlux USD EQ | ↑ | 77.5 |
Even though CLO^2 have fared better than other CDOs of tranched risk, this type of instrument is doomed: The credit risk uncertainty is magnified so much by the second or third re-securitization that the final product is impossible to bracket in terms of credit risk. Just leave these strategies to credit funds - they do not belong in the rated debt universe.