Record excess spread helps all CLO investors, says Citi

CLO investors often neglect the powerful benefits of excess spread, points out Citi in its latest structured credit research report. In a piece entitled Loan-backed CDOs help credit fund returns, the bank’s analysts say that in many US CLOs excess spread is now wider than it has ever been at over 200 basis points. The reason for the growing difference between spreads on assets and those on CLO liabilities are loan amendments and extensions, which typical bring a step-up in coupon, and reinvestment of principal at wider spreads.

The report says that excess spread supports all investors in a CLO, since it is used to pay down liabilities. In some deals it can be used to pay down junior tranches, but in a more distressed deal it is used first to pay down senior notes.