CLO equity returns surge amid improving loan performance

The returns on the riskiest portion of collateralized loan obligations (CLOs) are surging, reaching about 20% annualized in both Europe and the US. This boost is driven by improved loan performance, tighter debt spreads, and increased payouts. A structural feature allowing managers to add new debt to old deals has further enhanced returns for the equity slice, which is the first to take losses. CLO managers are leveraging lower funding costs to issue more lower-rated bonds and sell “deferred class F tranches,” which provide fresh distributions to equity holders.

The rally in risky debt, as recession fears wane and pricing recovers, has also been beneficial. More than a dozen such deals have been issued in Europe this year. Additionally, many CLOs exiting their non-call periods can be refinanced, restarted, or liquidated, freeing up more cash for the equity portion.

CLO equity returns have been volatile due to fluctuating arbitrage between the yields from loans and the funding costs of bonds. However, European arbitrage levels have stabilized and begun to rise slightly. In the US, equity payments have strengthened, allowing refinancings post non-call periods.

These high returns may not be sustainable. Falling interest rates or increased financial distress could reduce returns. Default rates have been lower than expected, benefiting CLO equity, but this trend might change. Investment banks are also seeking to reclaim business from direct lenders by pitching refinancings of risky private credit. Meanwhile, investors in top-rated bonds backed by commercial real estate debt are facing losses for the first time since the financial crisis, and the rise of robot investors is reshaping credit markets, challenging traditional portfolio managers.

Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.

Click to view all articles for the EPIC:
Or click to view the full company profile:
Facebook
X
LinkedIn
Volta Finance

More articles like this

Volta Finance

High-yield bond market analysis: Risks and opportunities

Junk bonds, also known as high-yield bonds, are debt securities rated below investment grade by credit rating agencies. These bonds offer higher yields to compensate for their increased risk of default. Investors are drawn to these

Volta Finance

Advantages of investing in Structured Products and CLOs

Structured products and collateralised loan obligations (CLOs) have become increasingly popular among investors seeking to diversify their portfolios and achieve higher returns. These financial instruments, while complex, offer unique advantages that can enhance investment strategies when

Volta Finance

ECB decisions and market reactions

The recent decision by the European Central Bank (ECB) to deliver a 25 basis points cut on the three key interest rates has sparked various discussions. The ambiguity surrounding President Lagarde’s refusal to provide forward guidance

Volta Finance

CLOs and their role in a sustainable future

Collateralized Loan Obligations (CLOs) have emerged as a significant element in the fixed-income market, offering attractive yields to investors. However, with the increasing emphasis on Environmental, Social, and Governance (ESG) factors, it raises the pertinent question

Volta Finance

CLO markets show strong demand and returns

The Federal Reserve on 1st May highlighted that inflation remains high and does not plan to cut interest rates until it is confident that inflation is slowing towards its 2% target. Despite economic uncertainties, the Fed’s

Volta Finance

The emergence of European middle market CLOs

Collateralised loan obligations (CLOs) are a significant element in the European capital markets. In 2023, the public issuance of CLOs in Europe maintained a steady volume of €26 billion across 69 deals, mirroring the previous year’s

Volta Finance

CLOs: One of the most underutilized asset classes

In the aftermath of the Global Financial Crisis (GFC), Collateralized Loan Obligations (CLOs) emerged as a contentious topic and were viewed through a cautious lens. However, as financial markets have evolved, the asset class has been

Volta Finance

Why CLOs are outperforming core bonds in today’s market

CLOs provide the attributes that investors look for in their core bond portfolios: attractive yield, safety, and diversification, and have continued to outperform core fixed income through this most recent volatility. As a result, an allocation

Volta Finance

Understanding CLOs and How They Work

Collateralized Loan Obligations (CLOs) are a new asset class within the finance world. They offer diversification options and potential attractive returns to investors. However, their complex structure and involvement of multiple parties can make them difficult

Volta Finance

Stability and Performance of European CLOs

European collateralized loan obligations (CLOs) have proved remarkably stable since S&P Global Ratings rated its first transaction in 2000. During this time, European CLOs have resisted several upheavals, including the global financial crisis, the dotcom bubble,