“The re-emergence of the primary market confirms our belief that CLOs are here to stay.” As at the end of last year Babson Capital and competitor Carlyle both had about US$21 billion under management in CLOs – the two largest such managers in the world. Both firms oversee deals globally, mainly in the US and Europe. According to research by Babson, the financial crisis did not result in any cases of the senior cashflow CLOs incurring any principal losses. Most junior tranches, which did suffer in the meltdown, were currently trading at 70-85 per cent of their pre-crisis levels. More than 80 per cent of the CLO equity tranches were cashflow positive. “Ratings agencies are currently upgrading CLO tranches, not downgrading them,” Natcharian said.
“The credit performance of the underlying collateral – syndicated bank loans – was both predictable and transparent. Default and recovery rates were consistent with previous recessions and have quickly returned to pre-crisis levels. Secondary market liquidity allowed for normal market operation and price discovery.” A remaining issue for CLOs with some super funds was their complexity. There were multiple tranches for investment – senior debt, mezzanine debt and equity – with different risk/return characteristics. The yield for senior investment-grade credit was between 3-6 per cent; for mezzanine it was 5.75-11.0 per cent; and for equity it was 10-15 per cent.