CLO Market Musings: Primary MM CLO Pricing
Recently, Golub Capital CLO 71 (M) was priced at 195/260/325/510 for its AAA/AA/A/BBB tranches, respectively. Given the size of the deal, achieving these pricing levels was impressive.
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Recently, Golub Capital CLO 71 (M) was priced at 195/260/325/510 for its AAA/AA/A/BBB tranches, respectively. Given the size of the deal, achieving these pricing levels was impressive.
🌟 January 2024 CLO Insights: This month's CLO research wrap is packed with key findings. Discover the latest trends and insights shaping the CLO market now.
Recent primary US CLO and reset prints at the AAA–BBB levels suggest that these levels are largely consistent with historical averages.
Recent primary CLO and reset prints at the BB level suggest that demand for BB is very strong. Anecdotally, it appears that numerous investors in the market have a preference for the risk-return ratio of the BB tranche. The carry is solid, and the BB tranche has demonstrated resilience across various credit cycles.
Last week, GoldenTree achieved a notable AAA print of 150 bp, marking the tightest level since May 2022. This achievement can be attributed to the manager’s established track record, its tier-one status, and the strong demand for AAA.
The table below displays a list of the top 15 largest global CLO managers, ranked by their CLO assets under management (AUM) in USD billion as of December 31, 2023.
As of December 31, 2023, a notable proportion of the 135 managers, each handling over $0.7 billion in US CLO AUM, have been inactive in pricing new issue deals. Specifically, around 40% of these managers have not priced a primary deal in the last six months. In addition, a quarter of them have not engaged in such pricing for over a year, while approximately 15% have remained inactive in this regard for the past two years.
As we leap into yet another promising year, hopefully, I extend my heartiest wishes to my fellow CLO equity and debt investors, as well as our esteemed partners in the fabulous world of CLOs. May this year bring a continuous upswing in CLO equity NAV, empowering us to navigate with more flair and present opportunities to redeem some of our ‘vintage’ deals. In anticipation of a market that’s as dynamic as a New Year’s Eve party, we eagerly hope for a scenario where CLO liability spreads tighten faster than my New Year’s resolutions fade, thus creating a more robust and profitable landscape for us all. Of course, we need the corresponding asset spread tightening to be restrained, so as not to spoil the party.
Wishing you a holiday season that embodies the best of a CLO’s structure: the strength and reliability of the senior tranche, ensuring your festivities are filled with unwavering joy; the adaptability and opportunistic spirit of the mezzanine tranche, bringing excitement and variety to your celebrations; and the high-reward potential of the equity tranche. May your Christmas be as well-rounded, healthy, and prosperous as a well-balanced CLO portfolio!
In the US CLO market, the size of managers plays a role, with larger, seasoned managers generally outperforming their smaller counterparts. This observation is based on a sample of seasoned deals from 2015 to 2019. However, it’s important to note that this trend is not universally applicable, as variations in performance are observed among both large and small managers. In contrast, in the European CLO market, the size of managers does not appear to be a decisive factor in asset outperformance. Recent analysis of deal performance, particularly of the 2021 vintage, indicates that small European CLO managers are significantly represented in the top quartile, as assessed by their annualized alpha performance since inception.
CLO equity distributions can sometimes be mistaken for returns. However, it’s crucial to understand that these distributions are not the same as actual returns.
It is encouraging to witness the year-to-date (YTD) upward trend in the floating spreads of collateral for EU CLOs, as observed in a sample of 2021 vintage deals. The inherent long-term, non-recourse funding nature of a CLO structure provides managers with an opportunity to navigate challenging environments and bolster their net interest margins during periods of volatility.
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%.
Please refer to the table below for a comprehensive list of US CLO managers, along with their BSL and MM assets (in billions) under US CLO management.
Historically, pricing a CLO deal has proven more straightforward when the loan market is robust and stable. As illustrated in the table below, approximately 75% of US CLO deals were priced when the Morningstar LSTA US B-BB Ratings Loan Index's bid price was 97 or above, with around 61% of deals priced at an index bid price of 98 or higher.
