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.
Typically, deals that rank well in terms of CCC exposure would be expected to perform well. This appears to be true only to a certain extent. The median deal with CCC exposure of 4 to 5 percent did well, achieving 25 basis points of alpha, while the median deal with CCC exposure of 5 to 6 percent registered an alpha of 22 basis points. However, for deals where CCC exposure ranges between 6 and 11 percent — representing approximately 80 percent of the sample — the relationship between alpha and CCC exposure appears to break down. For instance, deals with CCC exposure in the 9 to 10 percent range tend to perform better than those with CCC exposure between 6 and 9 percent.
Please see the chart below that displays the median DM pricing of primary US MM CLO AAA-BB tranches...
Please see the chart below that displays the median DM pricing of primary US BSL CLO AAA-BB tranches...
Please see the chart below that displays the median DM pricing of primary EU CLO AAA-BB tranches...
Please see the chart below that displays the DM pricing range (45th to 55th percentile) of primary EU CLO BB tranches...
Please see the chart below that displays the DM pricing range (45th to 55th percentile) of primary US BSL CLO BB tranches...
Based on a sample of 315 post-2012 US CLO deals that have been fully redeemed (excluding deals with debt impairment), the median deal displayed a collateral pool factor of 67% prior to full redemption. Notably, among these deals, 75% had a collateral pool factor of at least 41%, while 25% surpassed 98%.
Equity-friendly deals can typically expect a slower pay-down rate in the first and second years of the post-reinvestment period. These suggested annualized prepayment rates are derived from median metrics.
The next table displays the post-reinvestment (RI) end date prepayment rate ranges for 48 'equity-friendly' deals with less than 10% total prepayment rates during the first two years following the RI end date. Analysis of the median deals indicates that prepayment rates remained minimal in the first three years of the post-RI period.
The first table in this article showcases the prepayment rate ranges during the post-RI period for deals surpassing 10% in their initial post-RI year. By the close of the second year in the post-RI period, the median deals suggest that about 44% of the collateral balance would be prepaid. In comparison, 'more equity-friendly' deals would see only around 22% of the collateral balance prepaid, as illustrated in the second table.
Unlike in US BSL CLOs, the guidelines for purchases in US MM CLOs during the post-reinvestment (RI) period are simple and straightforward: managers are prohibited from acquiring new assets after the RI end date. This stipulation is appealing to debt holders.
The table in this article illustrates the average gross annualised return on underlying CLO collateral and the annualised cost of funding (inclusive of management fees) for each quarterly vintage of deals closed in 2022. On average, deals closed in the third and fourth quarters of 2022 saw a higher collateral return that more than compensated for the corresponding rise in their funding costs.
