Basic Premium

Below are tables presenting the MVOC (AAA-B) and EQ NAV of US BSL CLO deals by vintage, based on asset prices as of January 5, 2023.

Approximately one year ago, the CLO industry pondered where new-issue US CLO AAA spreads would land by the end of 2023. As we look ahead, what are your predictions for how the new-issue CLO AAA spreads will evolve by the end of the first half of 2024?

The table is structured with the first column listing the percentiles of the prepayment and purchase rates. The second column displays the actual annualized prepayment rates during the post-reinvestment (RI) period. The third column reveals the annualized prepayment rates during this period, assuming no purchases were made. The final column illustrates the annualized purchase rates during the post-RI period.

The table below provides a succinct summary of prepayment and reinvestment metrics for a collection of 16 EU CLO deals from 2018, with reinvestment end dates spanning from May 2022 to August 2022. It’s notable that the median prepayment rates were markedly low, at a mere 1% and 3%, respectively, for year 1 and 2 during the post-reinvestment period, primarily because most managers engaged in asset acquisitions at a median annualised rate of 15% and 21%, respectively, for year 1 and 2.

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%.

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.

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...