As an update to yesterday's piece, just to be fair to all parties involved, JPMorgan today stated they're newly bearish on AAA CLOs. Morgan Stanley yesterday described their bullish stance, saying that AAA CLOs could survive 10% CADR at 50% recovery rates. JPMorgan contend that widening is likely given the deep repressionary risk which will take its toll.
We'll keep you posted, but just a note that from an analytical perspective, unless (and this is a key "unless") the AAA tranches attaches (i.e., suffers any principal writedown), the value of the tranche will likely be higher for more severe default rate environments, as O/C trips will speed up payments to the AAAs. The shortened duration, then, improves the value when discount rates (DMs) -- as they are -- are higher than the promised coupon/spread on the tranche.
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