CLO Research

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.

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.

CLO equity distributions can sometimes be mistaken for returns. However, it’s crucial to understand that these distributions are not the same as actual returns.

It is encouraging to witness the year-to-date (YTD) upward trend in the floating spreads of collateral for EU CLOs, as observed in a sample of 2021 vintage deals. The inherent long-term, non-recourse funding nature of a CLO structure provides managers with an opportunity to navigate challenging environments and bolster their net interest margins during periods of volatility.

Typically, deals with high OC (BB) test cushions are expected to perform well, though this is not always the case. The median deal with an OC test cushion of 4 to 5 percentage points performed well, achieving 15 basis points (bp) of alpha. Deals with a small OC test cushion experienced more significant underperformance. Among deals with less than 1 percentage point of cushion, approximately three-quarters performed poorer than the loan index.

The table above displays the most recent minimum OC (BB or BBB) test cushions, segmented by vintage year. Interestingly, with the exception of deals from the 2015 vintage, the median deals from each vintage have demonstrated improvement from their levels at inception.

Unsurprisingly, the median 2014 vintage deal has the worst OC test cushion, underscoring the challenges of the 2014 vintage. Excluding 2012 deals due to their low count, the 2013 vintage has the next worst test cushion given that these deals have been outstanding for an extended period. Notably, the median 2018 vintage deal has a concerning test cushion of approximately 1.6 points, indicating a sizable erosion of principal value. This would negatively impact final equity IRRs. It appears that whenever there is a record issuance year, performance is somewhat affected.

Generally, the median values of deals from 2013 to 2022 exhibit healthy OC test cushions. In many cases, the deleveraging of performing deals has been shown to further improve OC ratios, a trend that is evident in the more seasoned deals.

Notably, since late 2020, US CLO managers have, on average, been adding value for their investors. This trend is illustrated by the blue line in the chart, which remains in positive territory. The annualized total return alpha since inception reached its peak around October 2021. This suggests that, on average, US CLO managers tend to add more value during particularly robust market periods. It is important to note, however, that the chart is based on averages. Nevertheless, there are managers who consistently add value in both weak and strong markets.

Generally, it's assumed that larger managers who buy the market might not perform well. However, an analysis of average alpha performance across categories reveals that larger US CLO managers have consistently outperformed their smaller counterparts, as evidenced by a sample of seasoned deals from 2015 to 2019.