MSCI: As Credit Risk Rises, Beware of Selection Bias in CLOs

Investors in the booming U.S. Collateralized Loan Obligation (CLO) market likely need to be aware of the risks: record tight spreads,1 deteriorating credit quality, and, as our expanded CLO data analytics reveal, selection bias risk.

The U.S. CLO market achieved a new record in 2017. New issuance exceeded USD 240 billion and reset and refinancing deals were about twice 2016’s volume. However, the credit quality of CLO collateral has been deteriorating. The exhibit below shows the trend in

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