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CLO debt investors add risk by dipping into equity tranches

Investors that have traditionally bought CLO debt are piling into equity tranches, sources say. This comes as the arbitrage between CLO assets and liabilities has reached its most attractive level in years (see cover story).

Sources say these investors are positioning themselves for early credit cycle conditions by adding risk.

“I’ve seen insurance companies come into equity, and also more asset managers that have historically been buying the triple B or double B bonds picking up the equity, too,” says Tricia Hazelwood, international head of securitised products at MUFG in New York. “They tend to focus on smaller pieces rather than majority equity.”

Newcomers attracted by the record arbitrage between CLO assets and liabilities are allocating to CLO equity for the first time.

“We’ve seen some new people come into the equity tranche, which is encouraging, and they were thoughtful about why they were coming into that space, finding equity investments to be an attractive relative value play,” says Hazelwood.