The next table displays the post-reinvestment (RI) end date prepayment rate ranges for 48 'equity-friendly' deals with less than 10% total prepayment rates during the first two years following the RI end date. Analysis of the median deals indicates that prepayment rates remained minimal in the first three years of the post-RI period.
Low prepayment rates after the reinvestment period can offer significant advantages to CLO equity investors, assuming the underlying portfolio maintains credit performance. A crucial consideration is whether managers are acquiring assets indiscriminately during the post-reinvestment period solely to prolong the lifespan of the CLO vehicle.
The table below presents a list of seasoned EU CLO deals that exhibit single-digit annualised prepayment rates during the first and second years of the initial two-year period following their reinvestment period. The last two columns of the table display the annualised prepayment rates if no purchases were made after the RI end date. In other words, on average, these deals experienced a reduction of 15 percentage points and 11 percentage points in their annual prepayment rates during the first and second years following their reinvestment period, respectively, thanks to the purchases made.
If no purchases were made after the RI end date, prepayment rates (based on the original collateral balance) for the first two years post-RI would be significantly higher than they currently are, as shown in the table below. In other words, on average, these deals reduced their annual prepayment rates by 21 percentage points and 24 percentage points for the first and second year following their reinvestment period, respectively.
"CLO equity investors would prefer to see lower prepayment rates, particularly during the first two years of the initial two-year period following the reinvestment period."
