Static CLOs offer lower liability costs
The guest argued that static CLO structures generate superior equity returns compared to traditional reinvesting CLOs by eliminating reinvestment risk and lowering structural fees.
The argument
In a static CLO, the asset pool is fixed and amortizes as underlying loans pay down, resulting in a shorter duration profile. The guest noted that this structure attracts lower liability costs and fewer administrative, legal, and rating fees, allowing more excess cash flow to accrue to the equity tranche.
The thesis, stress-tested
✓ What validates it
- ✓Sustained low liability spreads on newly issued static CLO debt tranches
- ✓Consistent equity IRR outperformance relative to reinvesting CLO peers
▸ Risks discussed
- ▸Lack of reinvestment flexibility to replace paying-down assets
- ▸Credit risk of the static pool must be managed purely through opportunistic sales
Hear it yourself
"So it's a much shorter duration profile of a CLO, and it takes away that reinvestment ability. But for us, as, you know, majority CLO equity investors in in our transactions, you can get a lot lower cost of liabilities because it's a much shorter duration product."
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