LCDX equity tranche more attractive than cash CLO equity, says MS

The best equity tranche opportunity across the credit markets is LCDX 0-8%, priced at around 75 points upfront, say analysts at Morgan Stanley in a research report. They reason the point saying no default IRRS are in the mid-30s and there is limited downside of 25 points given the all-upfront structure. The analysts say this is more attractive than cash CLO equity structures. Other factors that point towards the trade include LCDS cancellation risk and they have a reasonably constructive view on near-term default risk for LCDX series 9. The index tranche nature of the risk makes it a near-to-medium-term trading opportunity, they add. They like the trade mainly as an absolute long (no delta) since implied correlation is very high.
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