There is a significant divergence in exposure to loans priced below 80 among EU CLO managers, ranging from 1.4% to 24.1%. In contrast, the variation among US CLO managers is considerably narrower, ranging from 2.1% to 13.1%.
The chart below shows the resulting trend in new-issue US CLO BB DMs.
US BSL CLO pricing gaps are generally wider than they have been over the past year, particularly for BB tranches. The AAA–BB gap currently stands at 421bps, placing it at the 95th percentile over the past 26 weeks and the 87th percentile over both one and two years. The BBB–BB gap of 268bps is also relatively wide, ranking at the 90th percentile across all three periods.
Recent vintages underperformed as distributions received over their shorter lives were insufficient to offset the capital losses implied by BWIC levels, weighing on overall returns.
Across the 2021-vintage European CLOs in the sample, an average of 14.74% of the original collateral balance fell into price bands below 80. Against this backdrop, single-B tranches from this vintage face significant idiosyncratic credit risks. Around 37% of the single-B tranches in the sample had MVOC below 100%, contributing to market concerns about potential impairment across parts of this segment of the EU CLO market. At the lower end, Bridgepoint CLOs 2 and 3 had just 6.47% and 6.17% below 80, respectively. The five RRE deals had sub-80 shares ranging from 7.34% to 8.50%, with each holding less than 0.2% below 60. Capital Four CLO III also had relatively limited exposure, with 7.68% below 80 and 1.61% below 60.
The broader EU CLO single-B market continues to exhibit significant mark-to-market (MTM) pressure, with a substantial proportion of tranches showing limited or negative MV collateral coverage cushions.
