US CLO Equity: Loan Repricing Risk
With an average of over 40% of loans quoted above par (2014-2020 BSL CLO deals), underlying collateral repricing risk is now presenting another challenge to CLO equity investors, at a time when the actual ‘arbitrage’ is still on the mend.
According to LCD, thus far in January loan the repricing volume has shot to $38.7 billion from 26 transactions. On average, these deals are cutting 69 basis points off the Libor spread, or 84 bps off spread and floor combined.
Refinancing of CLO liabilities should help mitigate the underlying collateral repricing risk. The cost of CLO refinancing (borne by equity investors) needs to be justified by much tighter tranche spreads.
CLO Research believes that CLO liabilities are still too wide and should tighten much more so that CLO Equity actual arbitrage would be more secured. Based on the actual arb data observed so far, the actual US CLO arb picture is not looking good partly due to a tight net collateral margin (portfolio interest return net of WACC incl. management fees).
CLO equity investors need to see a more proportionate risk-return profile, if not, it would have implications on the sustainability of growth in the CLO market.
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 at 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.
