JPMorgan Chase & Co. (JPM) has created the first U.S. index of its type to measure returns of collateralized loan obligations, which are on pace for a record year of issuance.
The CLOIE gauge will be available for use today, according to Gloria Kim, the head of global index research at the bank in New York. The measure will allow users to track the price and total return of CLOs and their debt portions, according to the bank.
JPMorgan forecasts that as much as a record $100 billion of the funds that bundle junk-rated loans into securities with ratings as high as AAA may be sold in the U.S. this year. There has been $66.6 billion arranged in 2014, according to data from the bank. CLOs helped finance some of the biggest leveraged buyouts during the last credit boom.
This is the “first time anyone has tried to create a realistic index with rules that track the price performance and total return” of CLOs, Rishad Ahluwalia, global head of CLO research at JPMorgan in London, said in a telephone interview. “We want to challenge the market to improve transparency and while this will evolve over time, we want to help move it forward as the market develops.”
The CLOIE tracks floating-rate CLO securities for deals dating back to 2004, according to information from the bank. Additional sub-indexes are divided by ratings AAA through BB. Pricing for the index is provided by PricingDirect Inc., an affiliate of JPMorgan, according to the bank.
“For a while we wanted to create a transparent benchmark for investors that tracked returns,” Ahluwalia said.
The AAA rated portion of CLOs raised after the credit crisis has returned 1.07 percent this year, according to the JPMorgan CLOIE Index. That compares with 0.31 percent for all of 2013 and 3.86 percent in 2012.
The CLO measure follows the introduction of the JPMorgan Asset-Backed Securities Indices in 2013, according to the bank.
CLOs pool high-yield corporate loans and slice them into securities of varying risk and return, typically from AAA ratings down to B. The lowest portion, known as the equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their interest payouts reduced when loans backing the CLO default.
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