If the NAIC goes ahead and increases RBC for CLO junior debt and equity in a bid to close the RBC arb, then the arbitrage would be eliminated on day one. But over time it would open up once again (this time to the detriment of CLO investments) as the loan pool pays down.

As previously reported by Creditflux, the NAIC has suggested a 100% RBC factor for CLO equity investments. By its own definition, such a designation is reserved for “obligations that are at or near default”. Mayer Brown partner Paul Forrester put this into context, telling Creditflux that even venture capital equity investments are not given such designations.