Par structure CLOs have outperformed for equity, says Bloomberg

Bloomberg reports that CLOs using Lehman Brother’s “par” structure are performing well, suggesting that they are outperforming those using the more conventional CLO structure. The article says that the equity return on these structures is higher than 50% in one case.

The article does not give details of returns for specific deals, but quotes Gulf Stream Asset Management’s Mark Mahoney as saying that his firm’s recent equity returns have been between 25% and over 50% on its Par deals. See original article.

In the par structure, like the Apax deals arranged by Wachovia, defaults are bought out of the deals at par using a debt facility which must be repaid out of the CLO’s income. This means that defaults do not reduce the par value of the collateral. However, defaults must ultimately be paid for out of the CLO’s income.