10 years after crisis, another risky security on the rise
Yield-thirsty investors once again turn to complex cocktail of securitized loans
Volumes of collateralized loan obligations (CLO) hit a record US$247 billion in the first nine months of the year, the Wall Street Journal reports, in a sign that these types of complex structured investments are luring back investors searching for returns.
The record compares to a previous full-year high of just US$151 billion, and precrisis high of US$136 billion in 2006.
CLOs stack securitized bank loans of different levels of risk, with the bottom layer of high-return securities first in line to absorb losses, while senior slices offer lower returns and are more insulated from losses.
Despite, in the eyes of many, being lumped in together with other structured investments such as collateralized debt obligations, which were linked to the subprime mortgage crisis, CLOs maintained appeal after weathering the financial crisis comparatively well.
Between July and the end of September, BB-rated CLO tranches returned 25.4%, compared with a 25.2% return for the tech-heavy Nasdaq index, according to calculations from JP Morgan strategist Rishad Ahluwalia.
“CLOs have been an absolute home run,” Mr. Ahluwalia was quoted as saying, adding that such returns are not repeatable.
Pushing back on comparisons to conditions contributing to the financial crisis, Ahluwalia noted that “the leverage in the system today is a fraction compared to precrisis.”