[vc_row][vc_column][tm_heading tag=»h5″ custom_google_font=»» font_weight=»600″ text=»By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience.» line_height=»1.4″][tm_spacer size=»lg:25″][tm_heading tag=»div» custom_google_font=»» text=»Leveraged loans,” 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.»][tm_spacer size=»lg:63″][vc_row_inner][vc_column_inner width=»3/12″][tm_image image=»875″][tm_spacer size=»sm:30″][/vc_column_inner][vc_column_inner width=»9/12″][tm_heading tag=»h5″ custom_google_font=»» font_weight=»600″ text=»Use psychological pricing methods.» line_height=»1.4″][tm_spacer size=»lg:23″][tm_heading tag=»div» custom_google_font=»» text=»This 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 “tranches” of these CLOs has dropped to the lowest since the Financial Crisis.»][tm_spacer size=»xs:30;lg:35″][tm_heading tag=»div» custom_google_font=»» text=»Mass Mutual’s investment subsidiary, Barings, has packaged leveraged loans into a $517-million CLO that is sold in “tranches” 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&P Capital, cited by the Financial Times.»][/vc_column_inner][/vc_row_inner][tm_spacer size=»xs:30;lg:52″][tm_heading tag=»div» custom_google_font=»» text=»Also 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.»][tm_spacer size=»xs:30;lg:68″][vc_row_inner][vc_column_inner offset=»vc_col-md-6″][tm_heading tag=»h5″ custom_google_font=»» font_weight=»600″ text=»Demonstrate the differences» line_height=»1.4″][tm_spacer size=»lg:23″][tm_heading tag=»div» custom_google_font=»» text=»These 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.»][tm_spacer size=»sm:30;lg:68″][tm_heading tag=»h5″ custom_google_font=»» font_weight=»600″ text=»Offer a money-back guarantee» line_height=»1.4″][tm_spacer size=»lg:23″][tm_heading tag=»div» custom_google_font=»» text=»Libor 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!»][tm_spacer size=»sm:30;lg:68″][tm_heading tag=»h5″ custom_google_font=»» font_weight=»600″ text=»Test your offer and price, and be creative.» line_height=»1.4″][tm_spacer size=»lg:23″][tm_heading tag=»div» custom_google_font=»» text=»These low risk premiums over Libor are part of what constitutes the “financial conditions” that the Fed has been trying to tighten by raising its target range for the federal funds rate and by unwinding QE. It’s supposed to make borrowing a little harder and a little more costly in order to cool off the credit party.»][/vc_column_inner][vc_column_inner offset=»vc_col-md-6″][tm_spacer size=»sm:40″][tm_image full_wide=»1″ image=»876″][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]