CLO Research: Recent Findings
1) Based on CLO Research’s latest findings, size does not seem to have much impact on EU CLO managers’ investment performance. Notably, the alpha range for smaller managers (with less than 2bn AUM) is huge. Additionally, smaller managers also saw a lower total alpha, on average. The average liquidity metric looks similar for big and smaller EU CLO managers.
EU CLO Managers: Is Size an Advantage or Disadvantage?
2) WARF seems to be somewhat useful (to some extent) in assessing risk for EU CLOs but not really for US CLOs! How risky a portfolio is would perhaps be best observed when the loan market has declined. Q2 2020 was probably the most challenging period in recent memory. In general, EU CLO managers who had a lower average WARF (pre-COVID) experienced a higher level of resilience than their counterparts with a higher average WARF in Q2 2020. Unlike what has been observed in the EU CLO market, the average WARF (pre-COVID) metric is not very useful in assessing the riskiness of US CLO portfolios. That said, WARF metrics seem to have little bearing on the latest performance of EU CLO managers. Another consideration is the trading behaviour of managers in a period of enormous volatility. Some managers might have taken advantage of the volatility to improve the risk profile of their CLO portfolios. When it comes to the next downturn, these managers would see a much more resilient performance given the bigger headstart they have made for themselves.
US CLO Managers: WARF Does Not Appear to be a Good Risk Measure
EU CLOs: Is WARF a Good Risk Measure?
3) EU CLO managers adopt different styles when it comes to fixed-rate exposure. Research suggests some EU CLO managers do well with high fixed-rate exposure, while some deliver good performance with average or below-average fixed-rate exposure.
EU CLO Managers: Investment Performance and Fixed-Rate Strategy
4) Generally, it is easy to assume that EU CLO managers who build par normally perform better. However, it also depends on the quality of the par build. Besides, the distribution of par can also result in par loss (but will be reflected in the interest performance). That said, generally CLO managers who have crystallised too much par loss might not do as well from an MV alpha (unlevered basis) perspective.
EU CLO Managers: Annualised Par Build vs MV Alpha
5) The MV alpha trajectory of each CLO manager can be very different – emphasizing the importance of manager selection. From a debt investor’s perspective, besides looking at the latest MV alpha metrics, the volatility (or underperformance) of MV alpha would perhaps prove helpful for the pricing of new issue CLO-rated tranches.
EU CLO Managers: Volatility of MV Alpha (in Graph)
6) On average, EU CLO deals with vertical strip risk retention performed in line with their counterparts (horizontal slice retention) from an MV alpha perspective, but the former registered a higher interest alpha metric.
EU CLO Deal Performance: Vertical Strip or Horizontal Slice?
7) Based on a sample of 211 deals (vintage 2015 – 2019), over 70% of EU CLO deals arranged by GS registered positive total alpha. The benchmark loan index used is the S&P European Euro Denominated Loan Index and around 56% of the deals saw positive total alpha (unlevered basis) as of 29 March 2022.
Investment Performance of EU CLO Deals (Breakdown by Arranging Bank)
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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 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.
