Hedge Funders Fear Leveraged CLOs

Jun 24 2014 | 7:04am ET

A popular new technique for marketing low-yield tranches of collateralized loan obligations to investors has some hedge fund managers worried.

Top-rated slices of CLOs have often been difficult for banks to unload, owing to the low yield offered for the safest bits of such deals. Several banks have sought to offset that by offering buyers the opportunity to leverage the investments, increasing their returns.

Among the banks making such offers are Société Générale and RBC Capital Markets, according to the Financial Times.

While the overall amount of leverage in triple-A rated CLOs remains small, the level of concern at the iGlobal Forum in New York last week was not.

“I think there’s a lot of risk in the trade,” Eagle Point Credit Management’s Thomas Majewski said. “From a mark-to-market point of view I do question some of the motivations of the trade.”

Fortress Investment Group’s Joel Holsinger was somewhat less diplomatic.

“There’s been way too much supply on the issuance side because the markets allow way too many schmucks to come in and issue CLOs,” he said. “There will be stuff that’s going to unwind some of that and you can see it coming. It’s going to be ugly.”

BlackRock’s Scott Snell concurred: “My concern is, how do they really exit that trade?”

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