JPMorgan Chase & Co. (NYSE:JPM) has created an index that will allow investors to measure collateralized loan obligations (CLO), most often corporate debt.
Collateralized loan obligations used to finance leveraged buyouts
Collateralized loan obligations have been used to finance leveraged buyouts as well a secure financing for factory expansion and other expansion needs of large and mid-sized businesses. The loans are then packaged and sold as one security with ratings from AAA to BB.
The CLOIE gauge will enable investors to track the price and total return of CLOs and their debt portions, according to the bank.
CLO financing deals are hot this year, as JPMorgan Chase & Co. (NYSE:JPM) projects that a record $100 billion of the funds that bundle junk-rated loans into securities in 2014, while $66.6 billion as been arranged thus far, a report in Bloomberg noted.
JPMorgan creates a unique index that measures CLOs
This is the “first time anyone has tried to create a realistic index with rules that track the price performance and total return” of CLOs, Rishad Ahluwalia, global head of CLO research at JPMorgan Chase & Co. (NYSE:JPM) in London, was quoted as saying. “For a while we wanted to create a transparent benchmark for investors that tracked returns.”
By providing a pricing benchmark those investing in CLO products will have a measure to help them gauge the relative value of the deals in which they invested or help them make investment decisions going forward. The CLO index comes on the back of the bank’s introduction of the JPMorgan Asset-Backed Securities Indices in 2013, which serves the same purpose for a different asset type.
CLOIE index to monitor floating-rate CLO securities
The CLOIE index monitors floating-rate CLO securities for deals that date back to 2004, according to information from JPMorgan Chase & Co. (NYSE:JPM). Perhaps most interesting additional sub-indexes are divided by ratings AAA through BB. This enables investors to more precisely value the products they are being sold, something often difficult at times. Pricing for the index is provided by PricingDirect Inc., an affiliate of JPMorgan, the report noted.
“We want to challenge the market to improve transparency and while this will evolve over time, we want to help move it forward as the market develops,” Ahluwalia said.
The AAA rated portion of CLOs raised after the credit crisis, with the lowest assumed risk, has returned 1.07 percent year to date. That compares with 0.31 percent for all of 2013 and 3.86 percent in 2012. The amounts paid to investors in the products are often based on the interest rate market.
CLOs investment products typically combine high-yield corporate loans and package them into securities of varying risk and return. The highest ratings, AAA, offers the lowest return. The lower ratings, down to an equity tranche level of B, delivers the highest potential returns and the greatest risk due to the default risk of the underlying loans.