At a glance
- The note, reported by Alternative Credit Investor on Oct. 28, also cites materially better secondary market liquidity as a reason IG CLO tranches can sit in core public fixed income rather than only in an alternatives allocation.
- For an insurer, the review is a decision about which bucket the bonds sit in and which capital treatment applies.
- An insurer buying an IG CLO tranche is funding a CLO's loan purchases, and a wider insurance bid would add to demand for new-issue CLO paper.
Barings is urging insurers to review their investment grade CLO allocations, saying recent regulatory changes in Europe and the US are set to make senior tranches more capital efficient for insurance balance sheets. The note, reported by Alternative Credit Investor on Oct. 28, also cites materially better secondary market liquidity as a reason IG CLO tranches can sit in core public fixed income rather than only in an alternatives allocation.
"With compelling developments on both the supply and demand sides of the asset class, now could be an opportune time for insurers to review where IG CLOs can improve portfolio outcomes and how best to implement them within their accounting, capital, liquidity, hedging and governance frameworks," said Ruolin Wang, director of insurance solutions, and Bo Trant, client portfolio manager for global CLOs at Barings.
For an insurer, the review is a decision about which bucket the bonds sit in and which capital treatment applies. Barings lists a spread premium relative to investment grade corporates, regulatory capital efficiency, strong liquidity and diversification as the benefits. Its view that IG CLOs belong in core public fixed income suggests the tranches would compete with private credit for the same insurance fixed-income budget.
An insurer buying an IG CLO tranche is funding a CLO's loan purchases, and a wider insurance bid would add to demand for new-issue CLO paper. Barings says the market is already drawing a broader range of investors beyond traditional holders such as banks, pension funds and insurers.
Barings says CLOs issued from 2010 onwards have generally carried higher credit enhancement, tighter collateral eligibility criteria and more robust structural protections. The note says the tranches need to be properly structured and managed to be a flexible component of the insurance investment universe.
As Private Wealth Daily previously reported, Barings paid $66.2 million for a grocery-anchored center in Placentia, California, in a deal reported Oct. 27.
Reported by the Who's investing desk from Alternative Credit Investor and Private Wealth Daily archive. Published . Corrections