Seasoned EU CLO managers achieved, on average, positive alpha in 20 out of the 49 months covered by CLO Research’s study. Outperforming the loan index over a sustained period of time is no easy feat. The study examines a sample of 218 deals from 2015 to 2019, utilizing the Morningstar European Euro-Denominated Loan Index as the benchmark. It’s crucial to acknowledge that some managers consistently outperformed the loan index throughout the study period, while others frequently underperformed. Read more in the article: “Seasoned EU CLO Managers: Trends in Total, MV, and Interest Return Alpha (Updated)“.
In the context of a CLO structure, where the AAA component forms a substantial part of the capital structure, every single bp is crucial. Managers such as Golub, Elmwood, Irradiant, and AGL, have successfully tightened their BSL US CLO AAA prints, adjusting for market conditions and vintage. Another notable example is AXA. The manager has recently priced its AAA at 156 bps, which is impressive given that the manager has not priced a deal for quite a while. Read more in the article: “Further Thoughts on US BSL CLO AAA Pricing (Premium)“.
Short-dated, ‘principal-driven’ EU CLO deals, called within 1.5 years, have shown exceptional performance, with their average IRR standing at around 34.6%. However, not all high-performing deals, such as those from the 2022 vintage, are called; some opt for the reset route, which resulted in a few of these deals distributing a significant equity payout upon reset. Read the articles: “List of EU CLO Deals That Surpassed 10 Percentage Points in Latest Payouts” and “Equity IRRs of Fully Redeemed EU CLO Deals (Updated)“.
Rapid prepayment rates, especially in the first one to two years following the end of the reinvestment period, can significantly diminish a CLO’s leverage. This diminution, coupled with the increased cost of funding as the AAA tranche is retired first, substantially raises the likelihood of full redemption by equity holders. A significant outcome of this is its adverse effect on equity distribution. However, based on a sample of 145 EU CLO deals that exited their reinvestment period by 31 January 2024, the median distribution for EU CLOs has been trending upward. In the EU CLO market, numerous managers have successfully maintained investments during the initial years post-reinvestment. Read more in the article: “Equity Distributions in EU CLO Deals Post-Reinvestment Period“.
In contrast, the US CLO market has seen a downward trend in the median distribution for deals, based on a sample of 646 deals that exited their reinvestment period. While some managers have been more successful than others at maintaining investments and keeping prepayment rates low during the first year post-reinvestment, prepayment rates tend to accelerate in the second year and beyond. According to CLO Research estimates, 50% of US CLO deals were called when their collateral pool had a factor of at least 76.9%, and 75% were called with a factor of at least 48.3%. Read more in the article: “Equity Distributions in US CLO Deals Post-Reinvestment Period“.
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 at 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.
