CLO Research

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!

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 1, 2024.

Seasoned EU CLO managers achieved, on average, positive alpha in 20 out of the 49 months covered by CLO Research's...

These examples underscore the value of integrating loan market information to gain deeper insights into CLO AAA tranche pricing.

AAA tranches may not be as intriguing as mezzanine and equity tranches in terms of their risk profile, yet they...

Outperforming the loan index over a sustained period of time is no easy feat.

It is interesting to note that the median US CLO equity NAV metrics by vintage have remained largely unchanged from one month ago, set against the backdrop of a very flat loan market, as illustrated in the graph below. In addition, it is observed that the median equity NAV from the 2018 vintage appears to be relatively low.

In essence, this deal functioned as a classic principal-driven CLO, aiming to generate returns primarily through asset price appreciation rather than ongoing income. This strategy effectively capitalized on market volatility, leading the deal to perform as expected as the loan market rallied.

So, the question remains: why are US BSL CLO AAA prints still stagnant at 150 bp for managers with top-tier AAA prints?

The table below illustrates the equity distributions for EU CLOs, based on a sample of 145 deals. All these deals have exited their reinvestment period by 31 January 2024. Unlike their US counterparts, the median distribution for EU CLOs has been trending higher. In the EU CLO market, many managers have been more successful at maintaining investments in the first and second years post-reinvestment.

The latest median equity distribution was 2.8%, representing a decrease of 60 basis points from the previous median quarterly distribution—a significant decline. This suggests that an increasing number of deals may become ripe for a call over the next few quarters. However, the decision to actually call them will depend on several other factors.