Holders of the riskiest tranches of US collateralised loan obligations (CLOs) are seeing their returns crimped as rate hikes fuel a widening basis between Libor rates.
The loans held by CLOs generally reference one-month US dollar Libor, while the debt issued to investors references three-month US dollar Libor, creating a natural mismatch. In a benign market, the rates’ mismatch is usually “very, very tiny”, says Steve Hasnain, CLO manager at Pinebridge. Between 2018 and 2021 the basis averaged
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