Summary
- BB-rated CLO debt has shown to be a better value over many years than ordinary garden-variety BB-rated corporate debt (higher yields, lower defaults).
- Current CLOs are issuing double-B-rated debt in their capital structures at SOFR (the "new LIBOR" base rate) of 3.8% plus spreads of 8.7%.
- That adds up to a 12.5% coupon. But wait, it gets even better!
- CLO originators often have to issue the debt at a discount of as much as 8%, providing investors with an additional capital gain to be amortized over perhaps 5 years for an additional 1.6% per annum.
- Then adjust your capital invested (the denominator in the yield calculation) down to 92 instead of par (i.e. 100), and your yield computes to about 15%.
For further details see:
Case Study: Why Double-B CLO Debt Represents Such A Bargain