CLO equity investors get a lift from LIBOR below 1%
admin | March 13, 2020
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Roughly a third of US leveraged loans became fixed-rate investments on March 3 as LIBOR fell below the loans’ 1% floor. As much as 88% of US CLOs, meanwhile, have the 0% LIBOR floor or no floor, according to Creditflux. CLO equity investors profit from this mismatch, since the gains from loans floored at 1% are not passed onto bondholders. “The benefit of LIBOR floor to equity cash-on-cash is around 1.25 points each year for a 25 bp rally in LIBOR rates from their current levels”, according to Bloomberg. If LIBOR goes negative, however, then the 0% LIBOR floor in 60% of US loans will swing into action. Floored CLO notes will then be more valuable, as their floors will keep payments above their minimum. The articles are here and here (subscriptions required).
Sources: Creditflux, Bloomberg
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