CLO Buyers Chase Aging Equity

Secondary-market investors are bidding up a narrow class of collateralized loan obligation paper in hopes of locking in outsized returns.

The activity centers around the equity portions of CLOs issued from 2005 to 2007 that still are in their reinvestment periods. The securities have been in demand for some time, but reached a milestone in recent weeks when some began trading above par.

The reason: The coupons on the dealsí senior and mezzanine tranches initially were set to reflect smaller loan yields that prevailed at the time. That means managers who buy assets at todayís higher returns stand to create added profits that flow to equity holders.

CLO equity fitting the description has become increasingly scarce. Thatís partly because investors are sitting on their positions, and because deals are exiting their reinvestment phases as they age. According to S&P, 88 CLOs ended their reinvestment periods last year.

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