CLO Research

Recently, the arbitrage metric for new-issue US CLOs has exhibited a downward trend. It is noteworthy that when GoldenTree Loan...

Since June 2023, 81 BSL CLO deals have been reported to have undergone resets. Among these, 38 deals from the 2022–2023 vintages have reduced their cost of funding by an average of 44 bps, while also extending their reinvestment periods by about 2.5 years on average. These transactions are regarded as the most straightforward cases for resets, significantly boosting the value of equity investments through substantial reductions in funding costs and extended reinvestment periods.

It is interesting to note that, even among deals with identical AAA pricing, the all-in WACC can vary to a certain extent for US BSL CLO deals priced since mid-January 2024.

Below are tables presenting the MVOC (AAA-B) and EQ NAV of US BSL CLO deals by vintage, based on asset...

Managers with top-tier AAA spreads of 150 bps or tighter, based on median metrics, have consistently outperformed both the industry’s average and median alpha performance. Year-to-date, managers who have achieved AAA spreads of 150 bps or tighter include Blackstone, Blackrock, CIFC, Goldentree, Octagon, Ares, NB, PGIM, CVC, Oah Hill, Palmer Square, Elmwood, and Allstate.

The US CLO arbitrage (arb) has remained largely rangebound since July 2023. However, recently, there has been a noticeable downward trend in the arbitrage metric for new-issue US CLOs.

In terms of success with resets, Elmwood has distinguished itself as the most prolific manager, completing the highest number of resets. Since mid-2023, RR, Nuveen, CSAM, and Carlyle have each executed 3 resets.

Below are tables presenting the MVOC (AAA-B) and EQ NAV of US BSL CLO deals by vintage, based on asset...

Overall, during the post-reinvestment period, the manager's average annualized prepayment rates for the first and second years are 8% and 13%, respectively. These rates are significantly lower than those of their peers, which are 16.2% in the first year and 26.1% in the second year.

The rate of paydown for CLO-rated debt after the conclusion of the reinvestment (RI) period is influenced by several factors. These include the behavior of the CLO manager, prevailing market conditions, and specific terms detailed in the CLO’s post-RI documentation. In addition, the composition of the collateral pool also plays a role.

To date, the manager has successfully reinvested almost all principal proceeds, effectively maintaining an annual prepayment rate of around 0-1%.

Below are tables presenting the MVOC (AAA-B) and EQ NAV of US BSL CLO deals by vintage, based on asset prices as of March 8, 2024.

The challenge of resetting increases if the deal experiences a significant decline in the market value of its collateral due to poor performance, defaults, and trading losses. Pricing the reset for long-dated liabilities, especially at the mezzanine level, would become prohibitively expensive, even in favorable market conditions. In addition to the higher costs for the reset CLO liabilities, extra capital in the form of unrated debt or equity will be necessary. Typically, most equity investors would not want to put in new money to go after ‘bad’ money.

As indicated in the table, the median deal has already achieved a cumulative distribution of 122%, with more than 2 years of the reinvestment period still remaining.

Typically, resetting a deal is more feasible when the deal performs well and market conditions are favorable. For a comprehensive overview, please refer to the full list of US CLO deals that boast reinvestment periods exceeding 11 years. Remarkably, six of these deals feature reinvestment periods of over 13 years! This impressive performance stands as a testament to their success, highlighting that extending the reinvestment period by such a significant margin through resets—without any additional injection of capital—would otherwise be an exceedingly challenging feat!