Par-based investors in the triple-A CLO market may soon have their sense of security tested. Many still apparently cling to the assumption that their bonds will ultimately be repaid at par, based on the senior position of these bonds in the transaction structure and the corresponding protection from potential losses.

Our controversial view is that the secondary triple-A CLO market has been priced to an 'alternative' reality for quite some time. And we believe this pricing does not accurately reflect the chance that cumulative trading losses and defaults, coupled with significantly discounted net asset values, may challenge a par repayment of the triple-A tranche despite all the subordination.

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