“When I consider the CLO downgrades that come across the wire, the vast majority of them are single-B to CCC downgrades,” said Merrill, whose firm has more than $24 billion of assets under management.
For example, Moody’s Investors Service downgraded the B2 rated tranche of a 2014 CLO managed by Invesco last week, while upgrading or affirming the ratings in the higher tiers.
The push into the lowest rungs comes amid record demand. New CLO deals may be on pace to reach an all-time high of $150 billion this year, according to Wells Fargo.
“In long periods of low volatility, investors can become accustomed to carry-like returns,” Merrill said. “However, this rule of thumb can break down when it comes to single-B issuance, which in my mind could be the first area of the capital stack to exhibit strong negative returns at the onset of the turning of the cycle.”
This article was provided by Bloomberg News.