The CDO market continues to expand in leaps and bounds, and along with the expected surge in loan-only credit default swaps, one of the latest manifestations of its growth comes in the form of synthetic CLOs that uses total return swaps (TRS). This structure, the TRS CLO, is becoming more popular both with CLO managers as well as with investors, and if the loan market remains as it is today, market players expect the popularity of the TRS CLO to increase further.

For managers, a TRS CLO is a good way to get around the problem of allocation. In the loan market, competition for assets is still fierce, a CLO manager said, and there are still more buyers of leveraged loans than there is supply. Through the usage of a synthetic product, managers can ramp up with greater ease and are less reliant upon funded warehouse lines, as a TRS provider does not need to hold the loans, and can therefore avoid both the difficulty and cost of getting allocations, the manager said.

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