“Higher leverage implies lower borrower equity levels, greater default probability, and higher overall loss severity should a default occur,” Kroll analysts wrote in a note.
Still, many investors see these products as much safer than before the crisis because there are more protections built in and issuers have skin in the game.
Some of the crisis-era trades were called “kitchen-sink” deals, because all kinds of collateral, including the lowest-rated pieces of other deals, were thrown in, Shugrue said. The newer deals are different as they are mostly backed by first mortgages and issuers typically “eat their own cooking” by keeping a piece of the CLO, he said.
“The newer version is bread-and-butter collateral, and represents an ideal use of the structure to fund non-traditional lenders who have meaningful skin in the game,” said Shugrue.
This article was provided by Bloomberg News.