The European leveraged loan market has returned to levels last seen in early June 2022. Primary EU CLOs were priced at around 140/240/385/570/875/1150 bps (from the triple-A to single-B notes) at that time. The last EU CLO new issue was priced at 165/300/400/600/850/not offered. If the loan market rally can be sustained and other technical factors are favourable, it would not be surprising to see lags in CLO pricing resolved.
With rising rates, CLO equity tranches face more competition from lower mezzanine tranches. One of the main reasons investors like CLO equity is its quarterly cash-on-cash distributions. That said, with rising interest rates, lower mezzanine tranches are becoming a real alternative to equity tranches.
Based on the latest quarterly distributions, the median cash-on-cash distributions for single-B and equity tranches of EU CLO deals closed in 2021 are quite similar! The latest median quarterly cash-on-cash distributions for double-B and equity tranches of US CLO deals closed in 2021 are also fairly similar! Besides, unlike CLO equity tranches, lower mezzanine tranches do not have to worry too much about the final NAV they will receive. Rated tranches will eventually get par if there is no principal impairment. The question is: do CLO equity tranches need to differentiate themselves from the lower mezzanine tranches better?
Related articles:
Understanding The Commonly Used CLO Deal Metrics and Their Limitations
2021 CLOs: Lower Mezz vs Equity Cash-on-Cash
Latest US and EU CLO MVOC (AAA–B) and EQ NAV by Vintage
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.
