CLO Research

Tracking price buckets at 80/70/60 or below for US CLO underlying collateral can be useful in assessing tail risk in...

Several conclusions can be drawn from the chart. In particular, it appears that debt investors did not really price in the different post-reinvestment prepayment rates given the generic pricing assumptions for new issue deals. This raises the question: Should managers with higher post-reinvestment prepayment rates be priced tighter than those with lower rates?

Approximately one year ago, the CLO industry pondered where new-issue US CLO AAA spreads would land by the end of 2023. As we look ahead, what are your predictions for how the new-issue CLO AAA spreads will evolve by the end of the first half of 2024?

As we leap into yet another promising year, hopefully, I extend my heartiest wishes to my fellow CLO equity and debt investors, as well as our esteemed partners in the fabulous world of CLOs. May this year bring a continuous upswing in CLO equity NAV, empowering us to navigate with more flair and present opportunities to redeem some of our ‘vintage’ deals. In anticipation of a market that’s as dynamic as a New Year’s Eve party, we eagerly hope for a scenario where CLO liability spreads tighten faster than my New Year’s resolutions fade, thus creating a more robust and profitable landscape for us all. Of course, we need the corresponding asset spread tightening to be restrained, so as not to spoil the party.

Wishing you a holiday season that embodies the best of a CLO’s structure: the strength and reliability of the senior tranche, ensuring your festivities are filled with unwavering joy; the adaptability and opportunistic spirit of the mezzanine tranche, bringing excitement and variety to your celebrations; and the high-reward potential of the equity tranche. May your Christmas be as well-rounded, healthy, and prosperous as a well-balanced CLO portfolio!

The table is structured with the first column listing the percentiles of the prepayment and purchase rates. The second column displays the actual annualized prepayment rates during the post-reinvestment (RI) period. The third column reveals the annualized prepayment rates during this period, assuming no purchases were made. The final column illustrates the annualized purchase rates during the post-RI period.

The table below provides a succinct summary of prepayment and reinvestment metrics for a collection of 16 EU CLO deals from 2018, with reinvestment end dates spanning from May 2022 to August 2022. It’s notable that the median prepayment rates were markedly low, at a mere 1% and 3%, respectively, for year 1 and 2 during the post-reinvestment period, primarily because most managers engaged in asset acquisitions at a median annualised rate of 15% and 21%, respectively, for year 1 and 2.

The first column in the table displays the actual annualised prepayment rates, the second column reveals the annualised prepayment rates assuming no purchases were made during the post-reinvestment (RI) period, and the third column illustrates the annualised purchase rates during the post-RI period. It's notable that the median prepayment rate was markedly low, at a mere 2%, primarily because most managers engaged in asset acquisitions at a median annualised rate of 12%. Hypothetically, should all managers have refrained from reinvesting, the median annualised prepayment rate would have escalated to 15%.

In the US CLO market, the size of managers plays a role, with larger, seasoned managers generally outperforming their smaller counterparts. This observation is based on a sample of seasoned deals from 2015 to 2019. However, it’s important to note that this trend is not universally applicable, as variations in performance are observed among both large and small managers. In contrast, in the European CLO market, the size of managers does not appear to be a decisive factor in asset outperformance. Recent analysis of deal performance, particularly of the 2021 vintage, indicates that small European CLO managers are significantly represented in the top quartile, as assessed by their annualized alpha performance since inception.

The table below presents some median metrics for each quartile of managers’ performance, based on their annualised alpha metrics from issue dates to 27 November 2023.

This study encompasses a sample of 95 EU CLO deals, closed in 2021 and January 2022, managed by 46 managers. The benchmark used is the Morningstar European B Ratings Loan Index.

The tables provided offer a detailed overview of the final IRRs for 1.0 US CLOs, derived from a comprehensive dataset comprising 312 US BSL CLO deals, specifically from the 2006 and 2007 vintages.

This study includes a sample of 95 EU CLO deals (closed in 2021 and Jan 2022) managed by 46 managers, using the Morningstar European B Ratings Loan Index as the benchmark loan index. Of particular interest is the substantial representation of small European CLO managers in the top quartile. Notably, half of these high-performing managers are responsible for managing EU CLO assets in the range of EUR 1.0 billion to EUR 2.0 billion. However, it is equally important to recognize that small managers constitute a third of the managers in the lowest quartile. Despite this, small managers—those managing EUR 1.0 to 2.0 billion in EU AUM—have, on average, demonstrated commendable performance when compared with their larger counterparts in the EU CLO market.

A sample of 348 seasoned deals (2015–2019 vintage deals) managed by 56 US CLO managers is included in this study. The benchmark loan index used is the Morningstar LSTA US B-BB Ratings Loan Index.