Redding Ridge celebrated a significant milestone with an AAA print of 141 bps for its RRE 19 Loan Management deal on 24 May 2024. The deal’s estimated blended WACC (AAA-BB) of around 196-197 bps is the tightest so far this year. RRE 19 Loan Management’s AAA/AA/A/blended BBB tranches were priced at 141/205/255/360 bps, respectively. The DM information for its BB tranche was not disclosed; however, other recently priced top-tier BB tranches were in the 665-685 bps range. That said, these pricings are still wide relative to historical norms across the stack. Unlike their EU counterparts, US BSL CLO primary deals are pricing tighter across the stack compared to historical norms. The latest top-tier print was from Palmer Square Capital Management, which achieved an impressive WACC of 174.1 bps, the tightest level YTD.
US BSL CLO managers with a primary CLO blended DM print of below 190 bps are represented across the MVOC (BB) performance percentiles. In other words, managers in both the top and bottom quartiles managed to print their CLO liabilities with a blended DM of less than 190 bps. Does this mean that managers’ performance is less of a factor in determining primary issue pricing?
A sample of US BSL CLO 1604 deals is included in this study. The top five US BSL CLO managers with the highest number of deals in the top MVOC (BB) quartile are Oak Hill Advisors, Golub Capital, CSAM, Benefit Street Partners, and Elmwood. Golub Capital and Oak Hill stood out as the only two managers with an average top 10% ranking across all their deals. On the other hand, there are 40 managers who collectively manage 374 deals, none of which are in the top quartile.
It is not straightforward to compare annual distributions between performing deals, as many variables—such as the amortization of the class X tranche, the cash nature of the distribution, the leverage of the CLO structure, and par flush via different mechanisms—can easily skew the distributions. Nonetheless, examining the median equity distribution numbers of large samples can be useful. The large number of deals may illuminate the longer-term trend differences between the US BSL CLO and EU CLO markets. In terms of the latest median equity distributions, EU CLOs have done better than their US counterparts, largely due to the former’s better net interest margin metrics across vintages.
This study includes a sample of 602 seasoned deals that have concluded their reinvestment periods. Notably, CSAM stood out as the most successful all-weather manager in delivering good returns to equity investors. Other successful and consistent managers include CIFC, KKR Financial Advisors, Neuberger Berman, Palmer Square, Anchorage Capital Group, Goldentree Asset Management, Oak Hill Advisors, Generate Advisors, and Fortress Investment Group. Please note that the cumulative distribution metrics do not adjust for differences in management fees, etc.
While each CLO deal is different, understanding the historical prepayment rates during the post-RP for each manager remains highly beneficial. Analyzing these rates offers insights into the tendencies of different managers, highlighting those who consistently achieve lower prepayment rates and those who tend to experience higher rates in the post-reinvestment phase. In particular, 12 EU CLO managers have kept their annualized prepayment rates in the single digits for the first and second years post-RP, as shown in the table below. Among them, 5 managers have so far demonstrated the ability to keep annualized prepayment rates in the single digits for the first to third years post-RP.
Typically, it is much easier to reset a deal when it is performing well. In fact, several well-performing deals that were reset recently would have yielded equity IRRs ranging from 11% to 15% if they had been redeemed instead, after accounting for incentive fees and assuming an issue price of par. The decision to reset rather than redeem or sell the equity tranche on the secondary market suggests that doing a reset is more accretive and lucrative than a full redemption or sale. However, recent resets also indicate that more seasoned deals, including those that have lost a considerable amount of principal value but have amortized the AAA tranche to a certain extent, are still in a good position to execute a reset with or without injecting new equity capital.
Disclaimers
The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
The information and data provided herein (the “data”) is the proprietary property of S&P Global Limited and its affiliates (“S&P”). Neither S&P, its affiliates nor any third party data or service provider makes any warranty, express or implied, as to the accuracy, non-infringement, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. Neither S&P, its affiliates nor any third party data or service provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the S&P data, regardless of cause, or for any damages (whether direct or indirect) resulting there from. Any opinions, estimates and projections in the data herein do not reflect the opinions of S&P or its affiliates. S&P has no obligation to update, modify or amend this data or to otherwise notify the user hereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Without limiting the foregoing, neither S&P, its affiliates nor any third party data or service provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you or any third party as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the data, content, information or materials contained herein. All intellectual property and other proprietary rights comprised in the S&P data are and shall be the exclusive property of S&P or its third party providers. Except as otherwise expressly permitted by S&P in writing, the S&P data is made available to you under the condition that you shall (a) only be allowed to use the S&P data internally in the ordinary course of your business; (b) not use any S&P data to create books of records or for position level valuation purposes; (c) not redistribute, transfer, sub-license, rent, lend, transmit, sell, resell, recirculate, repackage, lease, publish or otherwise re-distribute or make available, any of the S&P data; and (d) not use the S&P data in connection with designing, creating, improving, developing, providing, sponsoring, administering, calculating, pricing or otherwise supporting any database, index, risk, performance or other analytics or other financial product or service (including without limitation any model, algorithm, identifier, reference data, liquidity metric, pricing or valuation service or any trading platform or pre- or posttrade servicing platform or to store or create a historical database thereof). Copyright © 2023, S&P Global Market Intelligence.
