CLO managers may benefit from buying discount assets, says Citi

In its latest Global structured credit strategy report, Citi points out that a number of CLO managers have bought significant amounts of discounted securities even though they receive no benefit from these trades in terms of their overcollateralisation ratios. In some deals, discounted assets account for almost one-quarter of the notional of the portfolio. Managers with the biggest holdings of discount obligations (typically, those bought at less than 85 cents in the dollar) include Babson Capital and Goldentree Asset Management. See table.

As Citi’s analysts note, this strategy may reap rich dividends for junior mezzanine CLO investors, if these assets return to par. The bank calculates that the pull-to-par effect is likely to add two to three points in overcollateralisation.

CLOs with highest exposure to discounted obligations

Source: Citi