medium · Asset-Backed Securities
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 new loan might be higher.
- It reduces the overcollateralization (OC) cushion and potentially the terminal value of the equity.
- It increases the equity distribution because the manager received cash from the sale.
- It increases the debt cost because the deal is now perceived as riskier.
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