Note

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.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Kara O’Halloran, CFA

Director, Investment Research

Robert Hoffman, CFA

Managing Director, Investment Research

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