Collateralized loan obligation equity returns have outpaced those of asset-backed security collateralized debt obligations. Widening leveraged loan spreads and stable CLO spreads have juiced up equity returns to 16% from less than 9% in May, a two-year high, according to Kedran Garrison, CDO researcher at JPMorgan. ABS CDO equity returns, meanwhile, are in the low to mid-teens.
BB and B loan spreads have widened 52 basis points since May on volatility in other corporate credit markets as well as a very large loan pipeline. CLO spreads, however, have stayed stable, giving the equity extra oomph. The relative value reversal may make CDO equity investors who can cross sectors sit up and take notice. "Arguably credit trends in leveraged loans are better than asset-backed securities with the concerns about the housing market," Garrison said.
