- Among larger US BSL CLO managers with at least ten deals in the sample (vintage 2013–2023), Oak Hill Advisors, Benefit Street Partners, Golub Capital, Allstate Investment, and BlackRock Financial Management have performed well from an MVOC perspective.
- Among EU CLO managers with three to six deals in the sample (vintage 2013–1H 2024), Neuberger Berman, Bridgepoint Credit, and GoldenTree Asset Management have also demonstrated strong MVOC performance.
- The recent pricing of RRE 24 has set a new benchmark for the AAA-BB pricing differential. In today’s higher interest rate environment—particularly in contrast to the negative 3M EURIBOR period from mid-2015 to mid-July 2022—demand for EU CLO BB tranches remains strong. Coupled with a resilient underlying loan market, primary and reset transactions priced this year have confirmed that the AAA-BB pricing differential has now firmly dropped below 400 bps. The tightest observed level to date has been RRE 24, at 334 bps (450 bps minus 116 bps). How much further can the EU CLO AAA-BB pricing differential compress?
- This engaging interview feature is part of a series with CLO managers, presenting a curated selection of questions from CLO Research alongside insightful responses from Bhavin Patel, Chief Investment Officer at Redding Ridge Europe.
- EU CLO equity NAV metrics continue to outperform those of their US BSL CLO counterparts across all vintages, despite the latter having considerably more diversified underlying portfolios. Notably, EU CLOs from the 2013–2014 and 2018 vintages exhibit significantly higher equity NAV metrics than their US counterparts.
- While the strength of the EU loan market and the ongoing repricing wave have negatively impacted CLO collateral spreads, this has been offset by the corresponding tightening of CLO liabilities. As a result, arbitrage has remained largely unchanged since the beginning of the year.
- Although each CLO deal has unique characteristics, analysing historical prepayment rates based on the original collateral balance during the post-reinvestment period provides valuable insights. This approach helps identify managers’ tendencies, distinguishing those with consistently lower prepayment rates from those with higher rates post-reinvestment. Notably, 11 US BSL CLO managers recorded single-digit prepayment rates during the first year of the post-reinvestment period.
- As of 31 December 2024, total EU CLO AUM stands at approximately EUR 245 billion, reflecting a compound annual growth rate (CAGR) of about 20% from 31 December 2017. Notably, CVC Credit Partners has achieved a robust CAGR of 21% since the end of 2017. When assessing the reinvestment profiles of managers with at least EUR 3 billion in EU CLO AUM, approximately 26% of their AUM has already passed its reinvestment end date, with an additional 13% projected to exit the reinvestment period within the next year. On average, an EU CLO manager expands by approximately EUR 0.5 billion per year from the launch of their inaugural deal.
- CLO equity investors generally prefer slower prepayment rates in the early years following the reinvestment period, as this helps maintain favourable leverage within the structure and supports more efficient funding costs. Additionally, it allows equity investors more time to evaluate the optimal call timing, which has proven particularly beneficial in today’s strong market environment. For example, a deal that exited its reinvestment period in 2022 and experienced a rapid annual prepayment rate, leading to significant deleveraging, would have been under greater pressure to be called at a time when market conditions were less favourable than they are today. Notably, nine EU CLO managers have maintained single-digit annualised prepayment rates for the first two years post-reinvestment.
- Among mid-to-large CLO managers with at least ten deals from the 2013–2023 vintages in the sample, it is worth noting that a manager can expand by $1.3 billion or more per year while still achieving strong MVOC performance within the top 33%. However, apart from one manager, none of the fastest-growing managers—those with an annual increase of at least $2 billion—have ranked in the top 33% based on the average MVOC percentile across their deals. This suggests that beyond a certain scale of annual growth, maintaining top-tier MVOC performance may become increasingly challenging.
- Investing in CLO equity is a complex process that requires deep understanding and a strategic approach. Known as the first-loss investment, CLO equity is fraught with inherent risks but also offers potential for substantial returns. The performance of these investments depends on several crucial factors, each playing a significant role in determining the ultimate success or failure of the investment.
- On average, EU CLO managers have met the expectations of their equity investors. Overall, based on deals that have already been redeemed or are anticipated to be redeemed, EU CLOs have delivered good performance, with an average equity IRR of 12.4%. This success can be attributed to a combination of factors, including disciplined issuance spurred by risk retention requirements, resets of more seasoned deals such as those from 2014 and 2015, the resilience of the underlying loan performance, the expertise of the managers, favourable CLO liability costs, and attractively priced assets, among others. Whether first-loss CLO equity, on average, outperforms third-party CLO equity remains an open question. Perhaps, the more important factor is manager selection.
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.
