Historically, pricing a CLO deal has proven more straightforward when the loan market is robust and stable. As illustrated in the table below, approximately 75% of US CLO deals were priced when the Morningstar LSTA US B-BB Ratings Loan Index’s bid price was 97 or above, with around 61% of deals priced at an index bid price of 98 or higher.
| Index Price Band | % of US CLO Deals Priced |
| 98 or greater | 61% |
| 97<=x<98 | 14% |
| 96<=x<97 | 9% |
| 95<=x<96 | 6% |
| 94<=x<95 | 4% |
| 93<=x<94 | 3% |
| 92<=x<93 | 1% |
| 91<=x<92 | 0% |
| 90<=x<91 | 0% |
| 90 or lower | 1% |
In instances where the market weakens, the new issue loan supply drops, and the CLO debt and equity investor base typically contract. Market participants tend to adopt a cautious stance, often opting to remain on the sidelines. Arbitrage may also become more challenging, as it takes time for the market to rebalance the arbitrage situation. Generally, assets tend to move first, with liabilities adjusting accordingly.
The capital-raising environment also becomes more challenging. Those with dry powder often stand to benefit, and, indeed, deals with outsized returns were generally priced during periods of significant market volatility.
| Year | Number of US CLO Deals Priced (when Index Price was 98 or greater) |
| 2012 | 103 |
| 2013 | 172 |
| 2014 | 214 |
| 2015 | 99 |
| 2016 | 59 |
| 2017 | 211 |
| 2018 | 226 |
| 2019 | 50 |
| 2020 | 42 |
| 2021 | 380 |
| 2022 | 71 |
When the market technicals are very strong and investors have confidence in the market outlook, more CLOs are priced. Primary CLO equity investors are optimistic about the credit outlook and may be willing to accept a lower target return or use a more optimistic set of assumptions in their modelling. For example, market conditions were favourable, and many CLO deals were priced in 2014, 2018, and 2021. Given these conditions, it will be interesting to see the final performance of CLO equity tranches from these vintages.
Related articles:
Timing of New Issues: How Volatility Benefited 2022 US CLO Deals
Timing of New Issues: How Volatility Benefited 2022 EU CLO Deals
Primary US BSL CLO AAA-BB Tranche Pricing In Different Market Conditions
Primary EU CLO AAA-BB Tranche Pricing In Different Market Conditions
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.
