A total of 463 EU CLO deals have either already passed their non-call period or will do so by the end of this year. Given that the current primary non-short-dated CLO WACC is around 199-204 basis points for top-tier names, many deals from 2022 and 2023 would see a reduction in their cost of funding if they were reset. So far this year, 20 deals from 2022 and 2023 have already been reset. Out of the 463 deals, 240 deals have a WACC of less than 170 bps. Notably, 8 deals have a very low WACC of less than 120 basis points, as they also feature sizeable fixed-rate tranches.
A sample of 67 US CLO deals that were redeemed in Q2 2024 is included in the study. Deals from the 2013 vintage performed well, with the median deal achieving an IRR of 13.7%. Deals from the 2020-2023 vintages also performed well, whereas the median deals from the 2014-2019 vintages did not perform as well.
From the perspective of debt investors, a more rapid prepayment rate is typically preferable following the reinvestment period. This is perhaps more relevant today, given that debt tranches are priced at fairly tight levels. Conversely, equity investors in CLOs typically prefer lower prepayment rates, especially during the initial years after the reinvestment period. Notably, 11 EU CLO managers have kept their annualised prepayment rates in the single digits for the first and second years post-reinvestment period. Among them, 4 managers have so far demonstrated the ability to maintain annualised prepayment rates in the single digits for the first to third years post-reinvestment period.
As of 26 July 2024, the latest arbitrage metric was recorded at 227 basis points, a visible improvement thanks to the recent tightening of CLO liabilities without the corresponding asset spread compression.
AAA tranches of top-tier EU CLO deals are still priced wider than historical norms, although the gap has been narrowing. In contrast, AA tranches are largely in line with historical levels, while single-A to BB tranches are significantly tighter.
Typically, when the loan market is strong, with many loans trading above par, loan repricing activities increase. Year-to-date, the median change in NIM ranged from -13 to -14 basis points for reinvesting deals issued from 2018 to 2023. The narrowing of NIM is not ideal for CLO equity, especially longer-dated equity.
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.
