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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.

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...

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.

Those with available capital, or 'dry powder,' often find themselves at an advantage. Indeed, deals yielding good returns were typically priced during periods of substantial market volatility.

Assets maturing in 2024 and 2025 necessitate more immediate attention, and to some extent, those maturing in 2026 do as well. As of 16 October 2023, approximately EUR 1.4 billion of assets maturing in 2024 were quoted below a 98 price. Similarly, around EUR 6.1 billion of assets maturing in 2025 were quoted below the 98 price.