It is encouraging to witness the year-to-date (YTD) upward trend in the floating spreads of collateral for EU CLOs, as observed in a sample of 2021 vintage deals. The inherent long-term, non-recourse funding nature of a CLO structure provides managers with an opportunity to navigate challenging environments and bolster their net interest margins during periods of volatility.
Improvement in the underlying collateral margin is typically a gradual process. During periods of weakness in the loan market, prepayment rates often remain low. However, it’s worth noting that the collateral margin for 2021 vintage EU CLOs has shown decent improvement this year. This progress has been supported by ‘amend-and-extend’ activities.
| Percentile | End of 2022 (%) | Latest (%) |
| 90% | 4.00 | 4.13 |
| 75% | 3.89 | 4.05 |
| 50% | 3.80 | 3.96 |
| 25% | 3.72 | 3.91 |
| 10% | 3.66 | 3.86 |
| Percentile | YTD Change in Collateral Gross Margin (Floating)* |
| 90% | 28 |
| 75% | 21 |
| 50% | 16 |
| 25% | 12 |
| 10% | 7 |
From an equity perspective, the trend in the underlying collateral’s weighted average spread also plays a crucial role in generating the necessary interest income to potentially offset future collateral losses resulting from defaults or trading. Given the leverage involved in the CLO structure, collateral losses have a disproportionate impact on equity NAV metrics.
* Fixed-rate assets are excluded from the calculation
Related article:
Timing of New Issues: How Volatility Benefited 2022 EU CLO Deals
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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.
