{"id":75,"date":"2018-01-05T07:00:51","date_gmt":"2018-01-05T07:00:51","guid":{"rendered":"https:\/\/cryptorepublic.app\/?p=75"},"modified":"2018-01-05T07:00:51","modified_gmt":"2018-01-05T07:00:51","slug":"big-reset-looms-for-corporate-credit-market","status":"publish","type":"post","link":"https:\/\/cryptorepublic.app\/?p=75","title":{"rendered":"The Biggest Reset Looms for Corporate Credit Market"},"content":{"rendered":"<div class=\"wpb-content-wrapper\"><p>[vc_row][vc_column][tm_heading tag=\u00bbh5&#8243; custom_google_font=\u00bb\u00bb font_weight=\u00bb600&#8243; text=\u00bbBy Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience.\u00bb line_height=\u00bb1.4&#8243;][tm_spacer size=\u00bblg:25&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbLeveraged loans,\u201d extended to junk-rated and highly leveraged companies, are too risky for banks to keep on their books. Banks sell them to loan mutual funds, or they slice-and-dice them into structured Collateralized Loan Obligations (CLOs) and sell them to institutional investors. This way, the banks get the rich fees but slough off the risk to investors, such as asset managers and pension funds.\u00bb][tm_spacer size=\u00bblg:63&#8243;][vc_row_inner][vc_column_inner width=\u00bb3\/12&#8243;][tm_image image=\u00bb875&#8243;][tm_spacer size=\u00bbsm:30&#8243;][\/vc_column_inner][vc_column_inner width=\u00bb9\/12&#8243;][tm_heading tag=\u00bbh5&#8243; custom_google_font=\u00bb\u00bb font_weight=\u00bb600&#8243; text=\u00bbUse psychological pricing methods.\u00bb line_height=\u00bb1.4&#8243;][tm_spacer size=\u00bblg:23&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbThis has turned into a booming market. Issuance has soared. And given the pandemic chase for yield, the risk premium that investors are demanding to buy the highest rated \u201ctranches\u201d of these CLOs has dropped to the lowest since the Financial Crisis.\u00bb][tm_spacer size=\u00bbxs:30;lg:35&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbMass Mutual\u2019s investment subsidiary, Barings, has packaged leveraged loans into a $517-million CLO that is sold in \u201ctranches\u201d of different risk levels. The least risky tranche is rated AAA. Barings is now selling the AAA-rated tranche to investors priced at a premium of just 99 basis points (0.99 percentage points) over Libor, according to S&amp;P Capital, cited by the Financial Times.\u00bb][\/vc_column_inner][\/vc_row_inner][tm_spacer size=\u00bbxs:30;lg:52&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbAlso this week, New York Life is selling the top-rated tranche of a CLO at a spread of less than 100 bases over Libor. And Palmer Square Asset Management sold a $510-million CLO at a similar premium over Libor. In the secondary markets, where the CLOs are trading, red-hot demand has already pushed spreads below 100 basis points. These are the lowest risk premiums over Libor since the Financial Crisis.\u00bb][tm_spacer size=\u00bbxs:30;lg:68&#8243;][vc_row_inner][vc_column_inner offset=\u00bbvc_col-md-6&#8243;][tm_heading tag=\u00bbh5&#8243; custom_google_font=\u00bb\u00bb font_weight=\u00bb600&#8243; text=\u00bbDemonstrate the differences\u00bb line_height=\u00bb1.4&#8243;][tm_spacer size=\u00bblg:23&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbThese floating-rate CLOs are attractive to asset managers in an environment of rising interest rates. If rates rise further, Libor rises in tandem, and investors would be protected against rising rates by the Libor-plus feature of the yields.\u00bb][tm_spacer size=\u00bbsm:30;lg:68&#8243;][tm_heading tag=\u00bbh5&#8243; custom_google_font=\u00bb\u00bb font_weight=\u00bb600&#8243; text=\u00bbOffer a money-back guarantee\u00bb line_height=\u00bb1.4&#8243;][tm_spacer size=\u00bblg:23&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbLibor has surged in near-parallel with the US three-month Treasury yield and on Monday reached 1.83%. So the yield of Barings CLO was 2.82%. While the Libor-plus structure compensates investors for the risk of rising yields and inflation, it does not compensate investors for credit risk!\u00bb][tm_spacer size=\u00bbsm:30;lg:68&#8243;][tm_heading tag=\u00bbh5&#8243; custom_google_font=\u00bb\u00bb font_weight=\u00bb600&#8243; text=\u00bbTest your offer and price, and be creative.\u00bb line_height=\u00bb1.4&#8243;][tm_spacer size=\u00bblg:23&#8243;][tm_heading tag=\u00bbdiv\u00bb custom_google_font=\u00bb\u00bb text=\u00bbThese low risk premiums over Libor are part of what constitutes the \u201cfinancial conditions\u201d that the Fed has been trying to tighten by raising its target range for the federal funds rate and by unwinding QE. It\u2019s supposed to make borrowing a little harder and a little more costly in order to cool off the credit party.\u00bb][\/vc_column_inner][vc_column_inner offset=\u00bbvc_col-md-6&#8243;][tm_spacer size=\u00bbsm:40&#8243;][tm_image full_wide=\u00bb1&#8243; image=\u00bb876&#8243;][\/vc_column_inner][\/vc_row_inner][\/vc_column][\/vc_row]<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Banks sell them to loan mutual funds, or they slice-and-dice them into structured Collateralized Loan Obligations (CLOs in short) and sell them to institutional investors. <\/p>\n","protected":false},"author":1,"featured_media":36,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[22],"tags":[26,28],"class_list":["post-75","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-innovation","tag-classic","tag-industry"],"views":644,"_links":{"self":[{"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/posts\/75","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=75"}],"version-history":[{"count":0,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/posts\/75\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=\/wp\/v2\/media\/36"}],"wp:attachment":[{"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=75"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=75"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cryptorepublic.app\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=75"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}