Freemium

The top-performing US CLO managers have been identified based on their total return alpha performance, as evaluated across a sample...

This article presents an analysis of the latest industry positioning of the five highest-performing EU CLO managers, based on their deals closed in 2021. Although it's not easy to pinpoint the precise industry positioning that drove their investment outperformance...

Market Value Over-Collateralisation (MVOC), for instance, at the BBB tranche level, is calculated by dividing the collateral MV by the sum of CLO liabilities (AAA to BBB). MVOC is a crucial point-in-time metric for pricing CLO-rated tranches, closely monitored by primary and secondary market participants. Calculating CLO Equity NAV involves dividing the residual collateral value (MV collateral net of total CLO debt notional) by the equity tranche notional. In today’s market, older vintage CLO deals with limited reinvestment flexibility may suffer more. For post-2012 CLO deals to deliver a decent equity IRR, the final NAV realization plays a crucial role.

Please see the table below for the latest list of US CLO deals (post-2012) with failing ID/OC test(s). Quite a number of these deals would see rated debt impairment eventually.

The tables below show the median MVOC (AAA-B) and EQ NAV of US BSL CLO and EU CLO deals* by...

“Generally speaking, deals with a bigger below 80 price bucket would tend to see their equity and lower mezz tranches get hit harder from a valuation standpoint.”

MVOC metrics fell dramatically across capital structure through 2022.

Please find the table below for the CLO collateral exposure by industry (Moody's classification) based on EU CLO deals closed in 2021–2022. The median EU CLO deal has an 15.8% exposure to Healthcare & Pharmaceuticals.

Based on deals that have been fully redeemed so far, a final NAV of over 50% is typically desired to deliver at least a high-single IRR number for CLO equity investors. Of course, annual distributions need to hit around 15-16% for about five years for a regular arbitrage CLO deal.

A slower prepayment rate would lead to a longer duration of the debt tranches. If the MVOC is also low, then debt investors might see higher price volatility. On the other hand, a slow prepayment rate would bode well for CLO equity valuation in general.

How quickly is CLO rated debt paid down post reinvestment end date?

Given that the US loan market is a lot bigger and diversified, the CLO overlap risk (between managers) is lower for US CLOs. It is apparent that the similar median EU CLO equity NAV across vintages can also be partially explained by the relatively higher reset level of older deals in Europe. Not many seasoned EU CLO deals have been fully redeemed. Also, many older vintage deals have been reinvesting for much longer than suggested by their reinvestment periods.

It is not a surprise that a better-annualised par build number does not necessarily translate to better investment performance. As shown in the graph, EU CLO managers with very similar levels of annualised par build metrics actually see very different MV return alpha performance.

Over US$220 bn of US CLOs would potentially become static if the reset market is not open for business over the next year.

As of 31 Oct 2022, the total size of the EU CLO market stood at around €200.3 billion.