AAA tranches may not be as intriguing as mezzanine and equity tranches in terms of their risk profile, yet they undeniably play a crucial role in influencing a deal’s arbitrage opportunities. This prompts the question: while all tranches are affected by demand and supply dynamics, could the pricing levels of AAA tranches be less sensitive to these fluctuations compared to smaller mezzanine tranches? Essentially, an oversupply of CLOs might have a more significant impact on the pricing levels of smaller mezzanine tranches than on those of AAA tranches. This topic merits further exploration in the future.
On a related note, a notable observation is the recent pricing of Golub Capital Partners CLO 72 (B). At 155 basis points (bps), its AAA tranche pricing is edging closer to the status of a Broadly Syndicated Loan (BSL) CLO manager with a top-tier print. Now only 5 bps away, this represents a significant shift. Historically, the average top-tier AAA print was priced at 158 bps in 2019, coinciding with a 4-week moving average loan spread of approximately 400-412 bps for the Morningstar LSTA U.S. B/BB Ratings Loan Index. In contrast, a Golub’s BSL CLO deal (2019 vintage) was priced at around 166 bps when the corresponding 4-week index’s moving average spread was 405 bps. This suggests that Golub’s previous AAA prints were roughly 8 bps wider than historical top-tier prints (158 bps), adjusted for vintage and market conditions, indicating an improvement of around 3 bps in AAA print.
Another example is AGL, with recent average pricing at 155 bps (average of 153 bps and 157 bps). In 2019, the manager priced a deal with its AAA tranche at 167 bps when the 4-week moving average loan spread was 401 bps. Using a similar approach, this implies AGL has improved by around 4 bps (from 9 bps to 5 bps) in its AAA print.
In addition, Irradiant priced its AAA at 160 bps. Employing the same approach, the manager has enhanced its AAA print by approximately 6 bps (from 16 bps to 10 bps).
Elmwood has achieved a top-tier AAA print, pricing it at 150 to 153 bps. This represents a tightening of 3 to 4 bps compared to its 2019 print, once adjusted for market conditions.
In the context of a CLO structure, where the AAA component forms a substantial part of the capital structure, every single bp is crucial. The managers mentioned have successfully tightened their AAA prints. Additional examples are available in the premium version of the article.
These examples underscore the value of integrating loan market information to gain deeper insights into CLO AAA tranche pricing.
Disclaimers
The Morningstar Indexes are the exclusive property of Morningstar, Inc. Morningstar, Inc., its affiliates and subsidiaries, its direct and indirect information providers and any other third party involved in, or related to, compiling, computing or creating any Morningstar Index (collectively, “Morningstar Parties”) do not guarantee the accuracy, completeness and/or timeliness of the Morningstar Indexes or any data included therein and shall have no liability for any errors, omissions, or interruptions therein. None of the Morningstar Parties make any representation or warranty, express or implied, as to the results to be obtained from the use of the Morningstar Indexes or any data included therein.
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 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.
