Market participants say there is greater risk in US portfolios, which has boosted the arbitrage opportunity in that market and led to greater issuance. “European CLOs have higher-quality collateral pools,” says Elena Rinaldi, portfolio manager at TwentyFour Asset Management in London. “The percentage of loans trading at 80 to 90 cents is about the same in Europe and the US. But tail risk is higher in US deals because they have a higher proportion of loans trading below 80 and have higher triple C exposure. Even taking wider junior US CLO spreads into account, European junior tranches appear to present better relative value.”

Over-collateralisation tests illustrate how European portfolios are cleaner. Not one European CLO has failed an OC test this year, while 192 US CLOs are in breach. The US Federal Reserve has created a primary dealer credit facility and revived its talf programme, making some CLOs eligible as collateral, and this has supported IG CLO spreads: triple A US CLO tranches have tightened to about 170 basis points for three-year deals versus about 195bp in Europe. But corporate credit has moved proportionally wider in the US versus Europe. CDX NA HY reached 648bp on 18 May, according to IHS Markit, which is 78% wide of its level on 2 March (365bp). European corporate credit has moved 63% wide in that time.