Bets on Risky CLOs Are Paying Off With 20% Gains: Credit Weekly

Returns on the riskiest portion of collateralized loan obligations are booming, reaching about 20% annualized on both sides of the Atlantic as loan performance improves, debt spreads tighten and payouts grow.

In some cases, a structural quirk that’s allowed managers to put fresh debt on old deals has also aided returns to the equity slice, the first piece of the structure that takes losses. Money managers that put together CLOs — bonds backed by a group of leveraged loans — are taking advantage of falling fundings costs and issuing more lower-rated bonds, instead of hanging onto them.

Many are now ...