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Structured Credit Maven Laila Kollmorgen on CLO’s Rally and Opportunity To Differentiate As Fundamentals Soften and Prices Climb | VanEck Fireside Chat #6
Forward Guidance
Balance the Risks of Default and Pricing
COOs must navigate the dual risks of loan defaults and the resulting pricing effects. A default may lead to a total loss if recovery is unsuccessful, but often, loans experience distress that impacts their market value. In many cases, loans may sell at a significant discount, such as 50 cents on the dollar, leading to potential losses for collateralized loan obligations (CLOs). The pricing of distressed loans often reflects anticipated defaults, but further mispricing can occur when other entities purchase these loans at higher valuations, which can exacerbate the CLO's losses. Therefore, an essential consideration for COOs is the performance of managers in trading distressed assets. Evaluating whether they can achieve par gains or manage the extent of par losses is crucial for mitigating financial risk.
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