Bloomberg News

Citigroup Says CLO Debt Is Still Cheap Versus Leveraged Loans

February 13, 2012

Feb. 10 (Bloomberg) -- Citigroup Inc., which priced a $436.7 million collateralized loan obligation for Apollo Global Management LLC earlier this month, said CLO debt is “cheap” compared with the underlying loans in the fund.

High-yield investors should be looking at CLO pieces as an alternative way of investing in these markets, Citigroup said in a research report published today. Citigroup suggested that investors reallocate money dedicated to BB rated loans and buy mezzanine CLO debt, the slices typically rated BBB or BB by Standard & Poor’s.

“CLO debt is still cheap to loans suffering from at least two poor technicals -- first a smaller investor base than loans, and second, financial and regulatory disincentive for many to hold this asset,” Citigroup analysts wrote.

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.

The price of a BBB slice of debt was 69 cents on the dollar on Jan. 12, according to Morgan Stanley data. It rose to a 2011 high of 81 cents in February. BB rated debt was trading at 64 cents on Jan. 12, down from last year’s high of 80 cents in February, according to the data.

Leveraged loans were trading at 93.55 cents yesterday, as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index. This was the highest level since Aug. 3.

Four CLOs

Four CLOs backed by widely syndicated loans totaling $1.7 billion have been raised in the U.S. this year, according to data compiled by Bloomberg. There were $11.7 billion of such funds raised in 2011. At the height of the market in 2007, $91.1 billion of funds were issued, Morgan Stanley data show.

Spreads on the highest-rated portion of CLO debt have tightened since October, when spreads hit the widest level since December 2009. The pieces were trading at 240 basis points more than the London interbank offered rate on Jan. 12, according to Morgan Stanley data.

The average spread on a term loan B was 515 basis points more than the benchmark, S&P Leveraged Commentary & Data show. Libor is the rate at which banks say they can borrow in dollars from each other.

--Editors: Dennis Fitzgerald, Chapin Wright

To contact the reporter on this story: Kristen Haunss in New York at khaunss@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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