Price Tiering in the CLO Market

Abstract

The collateralized loan obligation (CLO) market has grown to be a sophisticated and experienced capital market in the post-financial-crisis era. The authors focus on identifying and analyzing the differences that exist among CLO structures and their collateral managers and how these differences can influence the pricing of a CLO. As with any credit investment, it is important to understand a CLO bond’s covenants, or structural nuances, and the quality of its management team to fully assess relative value on a micro basis. Ultimately, the authors believe the alpha realized by CLO tranche investors will, in large part, be driven by the covenants, or lack thereof, that were negotiated into the offering documents.