EU CLO managers have demonstrated significantly greater success compared to their US counterparts in maintaining low prepayment rates during the first and second years of the post-reinvestment (post-RI) period. Approximately 14 experienced EU CLO managers have recorded annualised single-digit post-RI prepayment rates in these initial years, a feat that only one or perhaps two seasoned US CLO managers could achieve. This raises a critical question for CLO debt investors: Would you be willing to pay a premium for managers who achieve higher post-RI prepayment rates?
When adjusting for market conditions, primary US CLOs with top-tier credentials are typically priced in accordance with historical trends, with the notable exception of the BB tranche. Recent primary CLO and reset prints at the BB level indicate a robust demand for top-tier BB, suggesting a marked preference among numerous investors for the risk-return profile offered by the BB tranche. This tranche is noted for its solid carry and has shown resilience through various credit cycles. In contrast, in Europe, pricing for the primary AAA, AA, and BBB tranches is considerably wider than historical averages.
Regarding the performance of US BSL CLO deals from vintages spanning 2013 to 2019 in terms of cumulative equity distributions + NAV, a deal must achieve a total equity distribution + equity NAV exceeding 168%/148%/160%/150%/131%/130%/136% for the 2013/2014/2015/2016/2017/2018/2019 vintages, respectively, to be ranked in the 90th percentile. ‘Equity NAV’ is defined as the clean NAV based on asset prices as of 26 January 2024. CSAM has been particularly notable for its success and consistency in delivering strong returns to equity investors, with other successful managers including Oak Hill Advisors, KKR Financial Advisors, Goldentree Asset Management, Generate Advisors, Neuberger Berman, Fortress Investment Group, and Anchorage Capital Group. It is important to note that these cumulative distribution metrics do not account for differences in management fees and other charges.
The Madison Park Funding XLI deal (formerly known as Atrium XII), managed by CSAM and closed in late 2015, was recently called. This deal achieved an impressive average equity distribution of 19.1% over approximately eight years. A reset in late 2017 significantly reduced its funding costs and enabled the distribution of excess par upon reset, contributing to a strong initial distribution of 17.2% and boosting the average annual distribution. Excluding the par distributions, the deal’s annual distribution would likely hover around 17%, rather than approaching the 19% mark.
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