In a report entitled “Assessing CLO senior risk”, JP Morgan researchers point out that CLO triple A secondary spreads have blown out to a record wide of 375 basis points and analyse these investments from both a technical and fundamental perspective.

The report estimates that there is up to $250 billion of CLO triple paper held by banks, and assesses whether banks will be sellers. The researchers conclude that their difficulties in raising fresh capital will make European banks tend to hold onto these assets rather sell them. Most of these triple A CLO securities are held in books that are not marked-to-market through P&L so market losses do not reduce their capital unless they are impaired.

From a relative value point of view, the report compares senior CLO liabilities to the senior debt of a bank that engages only in corporate lending. The analysts note that unlike unsecured senior bank debt, CLO triple A liabilities are secured and also that, unlike senior debt providers to banks, they do not run the risk of being subordinated to depositors. The report also says that recent events dispel the myth that CLOs are inferior to banks because of banks being too big to fail.

The report concludes that CLO triple As now offer a 175bp premium to credit card triple As, a 225bp premium to CDX, a 91bp premium to bank senior debt and a premium of 249bp to LCDX 15-100% tranches on a delta-adjusted basis.