Pages from SOFR basis - January 2020

Basis risk has been on CLO managers’ (and equity holders’) minds. While the focus generally has been on one-month/three-month LIBOR basis, basis questions also have emerged in the SOFR space. Why? Because there is potential that CLO assets (e.g., institutional term loans) might transition from LIBOR to Simple Daily SOFR in Arrears, while CLO liabilities might transition to SOFR Compounded in Arrears. We discuss all below. (Spoiler:The Simple/Compounded SOFR basis is very small and should Shave a marginal impact on CLO equity returns.)

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SOFR-basis-January-2020.pdf

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