BlueMountain Sees ‘Mid-Teens’ Returns in Riskiest Slice of CLOs

BlueMountain Capital Management LLC predicts returns in “the mid-teens” from the riskiest pieces of junk-loan pools at a time when corporate bonds are paying record-low yields.

“We still like CLO equity,” Stephen Siderow, BlueMountain’s president, said at the Bloomberg Hedge Fund Summit in New York today, referring to the portions of collateralized loan obligations that are the first to absorb losses. “We like it because we like the loan asset class relative to unsecured bonds.”

CLOs pool together high-yield, high-risk loans and slice them into securities of varying risk and return. Leveraged loans have gained 9.7 percent this year, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan index.

Yields on high-yield bonds dropped to a low of 6.8 percent on Oct. 18, according to Bank of America Merrill Lynch index data, as the Federal Reserve’s stimulus measures push investors into lower-rated debt. The gap between yields on the bonds and loans, which are usually paid first in a bankruptcy, has fallen to less than half its historic average, according to JPMorgan Chase & Co. data.

To contact the reporters on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net; Nathaniel Baker in New York at nbaker14@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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Dec. 5 (Bloomberg) -- Steve Kuhn, head of fixed-income trading at Pine River Capital Management LP, Geoff Oltmans, managing director at Silver Lake Credit, and Stephen Siderow, president of BlueMountain Capital Management LLC about their strategy for structured credit products. Bloomberg's Nathanial Baker moderates the panel at the Bloomberg Hedge Fund Summit in New York. (Source: Bloomberg)