Are AAA CLOs "Safe?"

There's been a fair bit of structured finance research this month discussing, and mostly touting, the merits of investing in AAA CLO paper, which has been caught up in the generally widening market trend (currently trading around LIBOR + 475 bps).

For the most part, we expect the better cash CLO AAAs to avoid principal writedowns; generally, the underwriting standards for CLOs have improved over time, unlike their ABS CDO counterparts. Of course, the synthetic (LCDS) CDOs backed by senior secured loans (note: reference obligation is borrowed money) were not as fortunate. Many of these deals entered into an Event of Default upon Lehman's bankruptcy filing. See our prior pieces on Investigating the GIC and Eligible Investments for more on this.

For the leveraged/mark-to-market investor, we show a graph of the DM movement over the last 10 weeks -- based on just over 300 bid, offer and transactional data points since 07/31/08 -- and let you decide for yourself whether we're at the bottom:

(Click on it to enlarge the picture)