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CLOs and SRTs: structured products which are tranched up and reference a pool of loans. In many ways they’re twins. They’ve even got the three-letter acronym in common. But relative value investors are finding that CLOs and SRTs are not sibling products — and might not even be from the same family.

Investors say that that CLOs and SRTs are drifting further apart, particularly when it comes to pricing. Whereas SRTs are pricing tight even in the face of broader credit market volatility, CLOs moved wider post-‘Liberation Day’ and are only starting to return to those tights.

The cost of debt on new issue US CLOs was in the low 150bps area in late March, and after reaching over the 180bps mark for tier-one managers in April, it is now in the high 160bps and above area.

But with so much capital flowing into SRTs, there are questions being raised by relative value buyers as to whether deal economics make sense.

Sibling rivalry

First, let’s zoom out and line up CLOs and SRTs side by side.

SRTs, or significant risk transfers, are a credit protection instrument where investors guarantee the credit losses of a tranche from a bank’s loan book in exchange for coupon payments. The underlying pool of loans can be corporates, SMEs, leveraged finance, autos, credit cards, sub-lines and more. Most often the loans remain on balance sheet.

CLOs, or collateralised loan obligations, feature a pool of leveraged loans which are securitised, tranched and sold to investors. The loans are sourced in the open market across primary and secondary placements, and the resultant assets are monitored and rotated at the discretion of a CLO manager.

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