As of 28 June 2024, the US BSL CLO arbitrage metric was recorded at 223 bps, which is now in line with the median for deals in both 2022 and 2023. The median YTD 2024 arbitrage metric was 210 bps, which is fairly in line with the 2019 median metric. The 2018 arbitrage metric was the lowest at 191 bps, despite 2018 vintage deals having the tightest liability prints.
Typically, when the loan market is strong with many loans trading above par, loan repricing activities increase. Year-to-date, the median change in net interest margins (NIMs) ranged from -11 to -13 bps for reinvesting deals issued from 2018 to 2023. Conversely, net interest margin movements are different in the EU CLO market.
Thanks to the slower pace of amortisation during the post-reinvestment period, net senior AAA supply for EU CLOs was positive in Q2 2024, contrasting with its US BSL counterpart. Despite these differing supply dynamics, senior AAA spreads tightened by approximately 13-16 bps for top-tier managers in both US BSL and EU markets in Q2.
The EU CLO AAA print at 131 bps by FIL Investments indicates that AAA levels are another step closer to historical norms. Despite a healthy net positive AAA supply, EU CLO AAA continues to price tighter. It remains to be seen if the AAA level will fully return to historical norms.
According to LCD News, Barings has announced the liquidation of Barings Euro CLO 2014-2, with the expected redemption date set for 31 July. This deal has performed very well, paying an incentive fee to the manager since May 2023. This indicates that, due to its solid equity distributions since inception, the deal reached its 12% IRR threshold hurdle rate in May 2023.
Golub Capital Partners CLO 73 (M)’s AAA/AA/A/BBB tranches were priced at 162/190/240/410 bps, respectively. Tighter pricing relative to historical norms was seen across the stack. Notably, demand for the single-A tranche seems to be particularly strong, with a staggering 75 bps tighter than historical norms.
In the 2.0 CLO landscape, it is quite uncommon to see very high cash-on-cash equity distributions. However, 42 regular reinvesting US BSL CLO deals have distributed impressive cash payments to their equity investors, with annualised payments of around 25% or more so far this year. Unsurprisingly, out of the 42 deals, 13 of them distributed a significant amount of par upon reset, resulting in solid cash-on-cash payments. Sixteen deals benefited from solid net income margins due to the absence of management fees. Out of these 16 deals, 8 also benefited from high structural leverage thanks to having a single-B tranche in the structure, while 6 enjoyed a good funding cost due to favourable fixed-rate liabilities and above-average collateral spreads. There are 6 deals which benefited from very favourable and sizable fixed-rate liabilities, resulting in solid net interest margins. Out of these 6 deals, 1 also has very high structural leverage.
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.
