KBRA Releases Structured Credit Research: Not Your Father’s WARF

November 27, 2018

NEW YORK--(BUSINESS WIRE)--Nov 27, 2018--Kroll Bond Rating Agency (KBRA) releases a research report comparing portfolio risk and construction techniques of a small sample of CLO collateral managers. Arbitrage is a key consideration in CLO portfolio construction and structuring, along with the main strategy used to test if deals are economically feasible. The equity holders bear the most risk if the deal goes south but can reap big paydays if the deals perform, i.e., the arbitrage works. So we asked ourselves, where does the arbitrage come from?

Are managers just putting together homogenous pools of assets and shipping them off to arranging banks, who structure around the projected cash flows? Or is there a portion of the CLO portfolio specifically constructed to enhance the arbitrage? If you could bifurcate a portfolio into the big money-making assets, versus those that generate only enough cash to keep the deal’s lights on, what would this reveal about the risks of different portfolios and the styles of collateral managers? While it’s relatively simple to calculate one number from which you can draw one-dimensional comparisons and risk trends, we couldn’t help but wonder, would two be better? This is not your father’s WARF.

CLO portfolios do vary, and manager style is important to evaluate on multiple dimensions and not simply by average rating or spread alone. Certain portfolios may have bar-belled risks that drives the WARF even if the overall risk in a portfolio is comparable to the average in the market. These concentrations drive equity returns and are important for all investors to analyze because these are the positions that may differentiate the CLO from others in a downturn and may be the source of the largest cash flow changes over time.

KBRA believes that tracking this information over a time can add insight into manager style and the risk profile of their allocations. It may also help to track the alpha and beta assets in the leveraged loan universe. By comparing and contrasting the alpha and beta population, along with the αWARF, βWARF, and KM, both across managers and within the same manager’s vertical, we hope to provide investors with a more complete picture of portfolio risk and how it evolves.

To view the full report, click .

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

View source version on businesswire.com:https://www.businesswire.com/news/home/20181127005167/en/

CONTACT: Analytical:

Sean Malone, CFA, Director

(646) 731-2436


George Lyons, CFA, Director

(646) 731-3314


Eric Hudson, Managing Director

(646) 731-3320


Steven Zheng, Analyst

(646) 731-3379




SOURCE: Kroll Bond Rating Agency

Copyright Business Wire 2018.

PUB: 11/27/2018 09:00 AM/DISC: 11/27/2018 09:02 AM


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