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'Nonchalant' CLO Market Faces Hedging Risks in Libor Transition

  • Volatility, spread widening awaits in fourth quarter: Citi
  • Attention must be paid to issue looming at yearend: investor

The booming collateralized loan obligation market faces a chaotic end to 2021, when the benchmark London interbank offered rate is retired for new loan contracts.

At issue is how to hedge the risk to investors in CLOs, which are based on Libor, when their collateral pools are made up of leveraged loans based on a completely different benchmark. New loans may switch to an alternative such as the recommended Secured Overnight Financing Rate, which measures the cost of borrowing using Treasury securities as collateral.