CLO Research

It is encouraging to witness the year-to-date (YTD) upward trend in collateral floating spreads for EU CLOs in relation to...

Tracking price buckets at 80/70/60 or below for CLO underlying collateral can be useful in assessing tail risk in the asset pool. Among these price buckets, those at 60 or below can be particularly valuable in identifying assets that are truly distressed. However, it’s still important to consider the impact of trading activity on these buckets, as CLO managers may have traded out of distressed assets to crystallize portfolio losses. Therefore, it’s important to evaluate a manager’s performance as a whole. The following tables show the price buckets at 80/70/60 or below for US and EU CLOs by vintage, based on asset prices as of 2 June 2023.

The table below presents a list of seasoned EU CLO deals that exhibit single-digit annualised prepayment rates during the first and second years of the initial two-year period following their reinvestment period. The last two columns of the table display the annualised prepayment rates if no purchases were made after the RI end date. In other words, on average, these deals experienced a reduction of 15 percentage points and 11 percentage points in their annual prepayment rates during the first and second years following their reinvestment period, respectively, thanks to the purchases made.

Considering the current CLO equity NAV metrics for the seasoned deals, with approximately 58.1% of 2012-2018 deals having a negative equity NAV, it is highly unlikely that many of these deals would be redeemed anytime soon, even if their equity distributions are poor and they appear ripe for a call.

Typically, newer vintage deals tend to be ‘cleaner,’ but apparently, the 2021 EU CLO single-B MVOC metrics do not look as good compared to those of more seasoned deals (2016-2020). The median BB MVOC metrics are fairly similar across deals from 2013 to 2021, which also implies that older vintage deals have performed quite well compared to their newer counterparts.

Examining the exposure below the €80, €70 and €60 price buckets provides valuable insights into the tail risk of the collateral pool. However, it is important to note that these figures may be influenced by trading activities, which can distort the results. For instance, CLO managers may have realized credit losses and lost par due to trading underperforming assets. Therefore, data on the change in portfolio par since inception has been included to provide additional context.

If no purchases were made after the RI end date, prepayment rates (based on the original collateral balance) for the first two years post-RI would be significantly higher than they currently are, as shown in the table below. In other words, on average, these deals reduced their annual prepayment rates by 21 percentage points and 24 percentage points for the first and second year following their reinvestment period, respectively.

The speed at which CLO rated debt is paid down after the reinvestment end date depends on several factors, including...

The speed at which CLO rated debt is paid down after the reinvestment end date depends on several factors, including...

Considering the current CLO equity NAV metrics for the seasoned deals, it is highly unlikely that these deals would be redeemed, even if their equity distributions are poor and they appear ripe for a call.

Typically, newer vintage deals tend to be 'cleaner,' but apparently, the 2021 EU CLO single-B MVOC metrics do not look as good compared to those of more seasoned deals (2016-2020). The next table shows the BB MVOC metrics for each semi-annual vintage. Notably, the 2H 2022 and 1H 2023 semi-annual vintage deals have some of the best MVOC metrics.

According to Moody’s, it is anticipated that four industries will experience a default rate exceeding 4.0% within the next year. Notably, EU CLOs have a fair amount of exposure to only one out of these four industries, as illustrated in the table. Furthermore, Moody’s projects that only one industry – retail – will witness a default rate surpassing 5.0% over the course of one year. EU CLOs have limited exposure to this industry.

Overweight indicates that the manager’s average industry exposure exceeds the sample average exposure by 1 percentage point. Conversely, underweight means the manager’s average industry exposure is less than the industry average exposure by 1 percentage point.

The top-performing US CLO managers have been identified based on their total return alpha performance, as evaluated across a sample of 177 deals issued in 2021. Out of a total of 64 managers, the top five managers have been analyzed for their industry overweight/underweight. The table below illustrates their latest overweight/underweight standings.

The table below displays the average exposure of US CLO managers to price buckets below $80, $70 and $60, based...