CLO managers must avoid tail risk for better performance, says CSFB researcher

By Sara Rosenberg

New York, Dec. 4 - Managers of collateralized loan obligations must avoid tail-risk sectors in order to perform well in the current low inflation environment, said Jonathan Blau, researcher in Credit Suisse First Boston's high yield leverage loan group.

Previously, managers were able to run CLOs by "hugging the index", Blau told Standard & Poor's Loan Ratings & Recoveries in the Current Economic Climate conference in New York Wednesday.

But now, because there is high dispersion with 20% of the sectors performing terribly, managers need to be careful to stay away from the tail risks, like telecommunications, he said. If managers sample these weak sectors, their performance is dramatically different than if they avoid them.

One way to avoid risk is to look at the pricing of the debt security. In both the high yield bond market and leveraged loan market, debt that is priced around par is getting a decent return while those priced below par are losing money, Blau said.

Given all the challenges in this environment, there is an interesting phenomenon that the appetite for intermediate-risk assets, such as high-yield bonds and leveraged loans, has increased, according to Blau.

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