Seasoned CLO deals that make minimal or no equity distributions are under considerable pressure to be redeemed, with some investors eager to take advantage of any opportunities that arise. One example is a 2014 vintage deal that was recently redeemed. This deal experienced high annualized prepayment rates of around 31% in the first two years post reinvestment period. As a result, the cost of funding surpassed the portfolio’s weighted average spread (WAS) since late 2021, leading to the deferment of interest payments on its single-B tranche. In fact, the equity tranche of this deal did not receive any interest distributions since July 2021.
Another important consideration for this deal is its legal maturity date, which falls in July 2025. However, it is worth noting that CLO deals rarely reach maturity, leading to higher annual collateral par loss rates due to mark-to-market (MTM) losses. This, in turn, results in implied default rates that exceed reported defaults, factoring in trading losses and defaults. For the 2014 vintage deal, the reported annual default rate was 0.7% based on the original collateral balance, while the implied annual default rate was 2.0%, assuming a recovery rate of 65%. Due to a combination of these factors, the equity tranche of this deal suffered from a negative internal rate of return (IRR).
When examining the five most recently redeemed seasoned US CLO deals, their annual collateral par loss rates ranged from 0.48% to 0.78%. This indicates annual default rates of 1.4% to 2.2%, based on the original collateral balance, assuming a recovery rate of 65%.
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.