From a CLO debt perspective, selecting the right manager and deal with higher post-reinvestment period (post-RP) prepayment rates can be rewarding. Recent EU CLO AA tranches illustrated this point clearly.
Seasoned AA tranches with minimal post-RP prepayment rates traded materially wider than their counterparts with faster post-RP prepayment rates, as the latter benefitted from significantly higher MVOC levels driven by faster deleveraging and a shorter WAL.
A shorter WAL tends to be more favourable for senior CLO tranches, as an upward-sloping term structure means that tranches with shorter WALs generally trade at tighter DMs.
In the EU CLO market, deals that have concluded their reinvestment periods typically experience single-digit annualised prepayment rates in the first year post-RP. However, some deals that ended their RPs more than three years ago have continued to maintain single-digit annualised prepayment rates across years 1 to 3 post-RP, which would have been favourable for CLO equity investors.
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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.
