Suppose that static deals are priced wider or in line with the regular longer-dated CLOs. In that case, it could be due to their poorer-than-average MVOC metrics – this would typically dampen demand for the CLO-rated tranches. An uptick in static deal supply and the current low loan prepayment rate environment is not helpful, too. Whether static deals are truly static is also an important factor.
Historically, US static CLO deals have done quite well on average compared to the regular CLOs based on their final CLO equity IRRs. Some deals have lower management fees which help to contribute to better equity performance. That said, 2.0 CLOs are dependent on final equity NAVs in order to deliver strong overall returns. By comparison, 1.0 CLOs relied on high cash-on-cash distributions.
How is the EU CLO arbitrage looking these days? If the weighted average purchase price of the underlying collateral pool is good, then arbitrage is likely to work well. For example, suppose a deal has a final weighted average purchase price of 93.7. In that case, the collateral pool might produce a spread-to-maturity of around 540bp vs today’s 325bp weighted average cost of funding based on CLO tranche discount margins (without considering upfront costs and management fees). Suppose the market improves and returns to normality, say in three years. That being so, this CLO deal might potentially see an improved arbitrage given that the weighted average purchase price at the asset level is much lower than the CLO tranche level (around 98-99 areas). Of course, the above is a simple example, as the CLO manager plays a vital role in delivering for their investors.
As the loan maturity wall pressure does not build until 2025/2026, US BSL and EU CLOs might not see a meaningful volume of loan amend-to-extend (ATE) activities near term. Amend-to-extend would help boost the underlying collateral spreads. CLO deals with a good amount of WAL test cushion would be in a better position to take advantage of the ATE activities.
Compared to US CLOs, seasoned EU CLOs (that have passed their reinvestment end dates) tend to see lower post-reinvestment prepayment rates, especially in the first two years out of their reinvestment period.
Related articles:
US BSL CLOs: Loan Maturity Wall
US MM CLOs: Loan Maturity Wall
US BSL and MM CLOs: Post RI End Date Annual Prepayment Rates (Updated)
EU CLOs: Post RI End Date Annual Prepayment Rates (Updated)
A Niche Place: Static CLO Deals
Redeemed US CLO Equity IRRs: NAV vs Annual Distribution
Some Reflections on the Drivers of 1.0 US CLO Equity Outperformance
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.
