With heightened risk aversion sending spreads in the CDO market to gaping widths, the CLO market has seemed to remain intact. However, spillover from the subprime turmoil and hedge funds' recent attempts to divest their loan positions will push CLO liability spreads wider, market participants predict.
"Without a doubt, spreads will get wider," said a CLO manager, noting that liability spreads have progressively been pushed wider since the initial blowup in subprime and ABS in early spring. Previously, these deals were printed at close to market spreads and sold at a discount off the dealer's desk. But now, CDO experts are expecting spreads to be printing wider right off the bat.