The CLO Arbitrage and the Change in Interest Rates

In the past, there was an arbitrage opportunity for CLO cash flow. You could have a capital appreciation opportunity in two years where you call the deal and liquidate the portfolio at a profit. Or if interest rates have come down in those two years, you can refinance your cost of capital. So today, because loans are trading at a discount, you have the opportunity for capital appreciation in the underlying portfolio whenever that is.