Hedge Fund Sold CLOs to BofA at 80% Discount Amid Cash Squeeze

(Bloomberg) -- In one of the more desperate acts of the coronavirus-fueled credit crunch, a hedge fund last month sold about $100 million of European collateralized loan obligations for about a fifth of their face value, according to people with knowledge of the matter.

The hedge fund offloaded stakes in the lowest-rated tranches of European CLOs to a small group of banks including Bank of America Corp., said the people, asking not to be identified because the information is private. Trading in CLO equity has been sparse in recent weeks, with U.S. deals seen anywhere between 20 to 80 cents on the dollar, depending on the quality of the collateral pool, market participants said. European CLO equity prices are similarly marked, though the range could be tighter, one of the people said.

Hedge funds that buy structured-credit assets using borrowed money have been hit hard over the past two months as their investors have sought to withdraw money and their lenders have cut back on the leverage they’re willing to provide. The two-pronged assault led to a wave of selling in which many funds were forced to offload beaten-down securities at fire sale prices simply to meet liquidity needs.

A spokesperson for Bank of America declined to comment.

CLOs, which package and sell leveraged loans into chunks of varying risk and return, became a darling of asset managers from pensions to hedge funds in recent years as record low interest rates and depressed bond yields encouraged investors to take greater risk. For a number of funds, those risks are now coming to bear.

The asset class is battling a massive wave of downgrades to underlying corporate loans that threatens to overwhelm safeguards put in place to ensure the securities’ financial strength.

Some analysts expect as many as one in three U.S. CLOs may soon have to limit interest and principal payments to holders of the riskiest and highest-returning part of the CLO structure -- the equity portion. Even worse, payouts are already at risk of being cut off for investment-grade tranches in about a dozen different transactions totaling a few billion dollars, Bloomberg recently reported.

CLO debt rated BB fell to as low as 60 cents in late March, with the gauge rebounding in recent days to about 68 cents, according to Palmer Square index data.

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