It was a small triumph for the structured credit market when Investment banks successfully sold around USD 6.5bn (EUR 4.7bn) of corporate collateralized loan obligations (CLO) last month, proving there is still demand for structured credit products that part bundle leveraged loans despite broad market volatility.

CLOs are sophisticated instruments that pool senior and subordinated loans ahead of being securitized, repackaged and sold on to new investors as bonds backed with the same collateral but with varying risk profiles. Institutional buyers of CLOs have drastically cut back their exposure to the instruments over the last three months amid the turmoil and growing concerns over the quality of the leveraged loans underwritten by banks. Deutsche Bank said in a report that CLO volumes in August are still below the monthly average level of USD 7.4bn so far this year, but the sales represent a significant increase from July’s below-average volume of USD 3.3bn, while Thomson Financial reports a 3.5% rise in volumes YTD from the same period previous year.

However, spreads or risk premiums across CLO tranches have risen or widened out as buyers remain reluctant to increase their exposure. Anthony Thompson, research analyst at Deutsche Bank in New York, said that as long as the practice to lump CDOs of ABS and CLOs together as products with similar risk profile will continue, the former will negatively affect the confidence of the CLO products.

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.