Leveraged Loan Rally May Be Double-Edged Sword for CLOs
- Recovery in risk assets across the board boosts CLO appetite
- Arbitrage is recovering but still looks relatively weak
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The rally in leveraged loans may produce mixed results for collateralized loan obligations, which could stand to benefit from improved sentiment overall but lose some of the all-important arbitrage that helps the deals work.
The January rebound was seen across the board in risk assets, which should also boost CLOs by tightening spreads after they reached year-long wides in December amid falling leveraged loan prices. But rising loan prices typically crimp returns for CLO equity investors, a critical buyer base.