CLO Research

This edition of CLO Market Musings presents recent findings on US and EU CLO top-tier managers’ industry overweight and underweight positioning based on samples of 2021 vintage deals.

While using average metrics may have its drawbacks, as it can obscure some of the nuances that distinguish individual managers,...

The top-performing US CLO managers have been identified based on their total return alpha performance, as evaluated across a sample...

To expand the total alpha performance analysis, this study has included a sample of 177 more recent deals closed in...

Welcome to this edition of CLO Market Musings, where we are revisiting the limitations of using CLO equity cash distributions...

This article presents an analysis of the latest industry positioning of the five highest-performing EU CLO managers, based on their deals closed in 2021. Although it's not easy to pinpoint the precise industry positioning that drove their investment outperformance...

Previous articles in this series, titled "CLO Market Musings," talked about the significance of the eventual equity NAV realisation for a regular arbitrage CLO deal (with a longer WAL) with the goal of delivering at least a double-digit IRR for CLO equity investors. The accompanying table, based on 291 fully realized US CLO deals, demonstrates that a final equity NAV greater than 50% on average is needed to achieve a double-digit IRR for CLO equity tranches. It goes without saying that annual distributions have to be at a level that is at least somewhat satisfactory.

Market Value Over-Collateralisation (MVOC), for instance, at the BBB tranche level, is calculated by dividing the collateral MV by the sum of CLO liabilities (AAA to BBB). MVOC is a crucial point-in-time metric for pricing CLO-rated tranches, closely monitored by primary and secondary market participants. Calculating CLO Equity NAV involves dividing the residual collateral value (MV collateral net of total CLO debt notional) by the equity tranche notional. In today’s market, older vintage CLO deals with limited reinvestment flexibility may suffer more. For post-2012 CLO deals to deliver a decent equity IRR, the final NAV realization plays a crucial role.

The European leveraged loan market has returned to levels last seen in early June 2022. Primary EU CLOs were priced at around 140/240/385/570/875/1150 bps (from the triple-A to single-B notes) at that time. The last EU CLO new issue was priced at 165/300/400/600/850/not offered. If the loan market rally can be sustained and other technical factors are favourable, it would not be surprising to see lags in CLO pricing resolved.

With rising rates, CLO equity tranches face more competition from lower mezzanine tranches. One of the main reasons investors like CLO equity is its quarterly cash-on-cash distributions. That said, with rising interest rates, lower mezzanine tranches are becoming a real alternative to equity tranches.

The tables below show the MVOC (AAA-B) and EQ NAV of US BSL CLO and EU CLO deals* by vintage...

CLO MVOC metrics have all improved considerably across the board YTD (as shown in the tables below). Consequently, CLO debt...