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Thursday, October 04, 2007

It's All Very Simple

by Tanta on 10/04/2007 08:49:00 AM

Reader Avinash sends us the following from "Creditflux," which is not something I made up either:

In a new research report entitled "Leveraging CLO illiquidity premia", JP Morgan says that the combination of historically wide CLO liability spreads and near-zero default rates makes this an optimal time for buy-and-hold investors to consider investing in CLOs-squared. It says this is a way to efficiently monetise the current illiquidity created in the "spread rout of 2007".

The report concludes that CLOs-squared offer reasonably low risk relative to the underlying CLOs. Junior tranches in particular offer higher spreads than triple B and double B tranches of regular CLOs with similar or lower risk.

The researchers point out that CLOs-squared are conceptually similar to ABS CDOs, but that they are better suited for leverage. Corporate loans are simpler than subprime mortgages and hence more predictable, argues the report.
Yes, that makes a great deal of sense. These stupid subprime borrowers have been taking mortgage loans that are more complex than corporate loans, but we have no idea why nobody seems to understand what got signed at the closing table. Also, it's an excellent time for investors to look for more leverage opportunities, because this whole problem, you see, was just a matter of the underlying collateral and had nothing whatsoever to do with levering up complex derivatives or having to unwind some goofy structured deal.

Just shoot me . . .