medium · Asset-Backed Securities clos
A $500M CLO manager trades out of a loan at 95 cents on the dollar and buys a new loan at 98 cents.
How does this 'par loss' of 3% on the traded amount affect the equity's long-term arbitrage?
- It has no effect, since the spread on the newly bought loan could offset the discount taken.
- It reduces the overcollateralization (OC) cushion and potentially the terminal value of the equity.
- It increases the equity distribution, since sale proceeds are treated as excess interest available for payout.
- It increases the debt cost, since the deal is now perceived by rating agencies and investors as riskier.
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