It was an absolute pleasure to share my thoughts on the CLO market yesterday at the CLO evening event, graciously hosted by Reed Smith and SCI. Below are some of the key takeaways from my presentation.
Key Takeaways:
A key factor influencing CLO issuance volume is the robustness of the loan market, which plays a crucial role in shaping institutional loan volumes and the liquidation of seasoned deals, especially those that exited their reinvestment periods more than a year ago. Combined with a higher interest rate environment and increased demand for floating-rate assets, these factors contributed to a record-breaking year for primary issuance of US and EU CLOs in 2024.
In the EU CLO market, primary EU CLO pricing saw significant tightening in 2024 compared to historical pre-2024 levels, particularly at the BB tranche level, followed by BBB and single-A tranches. However, AAA and AA tranches remain wide compared to historical norms.
In the US BSL market, it is clear that top-tier CLO AAA spreads closely follow the 4-week moving average index’s discounted spreads. This is unsurprising, given that CLOs are arbitrage vehicles. Despite this, compared to 2021 pricing levels, today’s top-tier AAA pricing at 118bps remains wide after accounting for current market conditions.
Broadly speaking, seasoned EU CLO managers are currently aligning their performance with the Morningstar European Euro-Denominated Loan Index, while US CLO managers are tracking the returns of the Morningstar LSTA U.S. B/BB Ratings Loan Index. Although individual managers achieved varying levels of success—some performing better than the indices and others falling short—when we look at their collective performance as a whole (averaging out the highs and lows), it is very similar to the performance of the indices being referenced. This suggests that, overall, the indices provide a good benchmark or representation of the managers’ performance trends. Consequently, these indices serve as suitable proxies for CLO collateral discounted asset spreads when analysing arbitrage trends in the two markets. By the end of 2024, arbitrage levels for EU and US BSL CLOs were approximately 242bps and 213bps, respectively.
Lastly, the average IRR for fully liquidated EU CLOs was approximately 12.8%, based on an issue price of EUR 95. Notably, deals from the 2020 and 2022 vintages performed exceptionally well, demonstrating that issuing during periods of market volatility can also be highly profitable.
Disclaimers
The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
