Structured products ready for their CLOse up

Markets are watching as CLOs leave LIBOR. We assess impacts and spotlight opportunities remaining in the asset class

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November 18, 2021 | 10 minute read

The long-awaited transition away from LIBOR is upon us. For credit investors, this means a new reference rate for floating rate assets such as senior secured loans and asset backed securities. While the implications of this transition are broad based, touching nearly every corner of financial markets, we believe one of the largest impacts within credit markets will be on structured products. With many CLO investors focused on the cessation of this omnipresent reference rate, we’ll assess implications we see on the asset class from the transition away from LIBOR and provide an update on the CLO market more broadly. We continue to see an attractive opportunity for investors in CLO debt, both on an absolute basis and incorporated into a broader fixed income portfolio.

Key takeaways

  • The market will by and large transition away from LIBOR as of December 31, 2021.
  • Within credit markets, we see the biggest impact on CLO equity.
  • CLO managers face the risk of receiving interest payments from loans whose rates are based on SOFR while making payments on a LIBOR-based liability, or vice versa. Overall, we think CLOs are well positioned to navigate the transition.
  • In our view, CLOs represent an attractive opportunity in today’s market.

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Kara O’Halloran, CFA

Director, Investment Research

Robert Hoffman, CFA

Managing Director, Credit Wealth Solutions

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