CLOs Are Starting to Look More Alike, Stirring Uneasy Memories
- Chance of CLOs holding the same underlying debt is increasing
- In Europe, average overlap has jumped to 47%: Morgan Stanley
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Add this to the frenzied debate around the risks in collateralized loan obligations: it’s getting harder for investors to diversify.
While managers are bundling more varied loans into each security, diversification across CLOs in aggregate is deteriorating, analysis by Morgan Stanley shows. In other words, the chance of two CLOs holding the same underlying debt is increasing, meaning that a single soured loan could wind up hitting investors multiple times.