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Wall Street Games the CLO Machine to Stay Ahead of Downturn

  • More frequent resets and refinancings boost managers’ profit
  • Trade-off for CLO bondholders is they get lower duration
New Quant Fear Index Still Flashing Red for Stocks at SocGen
Photographer: Michael Nagle/Bloomberg
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Managers of collateralized loan obligations are taking advantage of a new tool to fine-tune deal terms to their benefit ahead of an expected turn in the credit cycle to higher rates and tighter lending.

CLOs, which securitize bundles of leveraged loans, typically last about four to five years before their managers sell the portfolio, pay the CLO bondholders and give the remaining cash to investors in the riskier equity part of the deals. That has started to change, as managers increasingly seek to tweak a CLO -- shortening maturities and lowering rates more frequently -- in a way that would game any souring business environment and consequent rise in rates.