January 2022 | Issue 241

CLO managers show respect to their elders

Sayed Kadiri headshot
Sayed Kadiri
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
Alongside lucrative new issues, managers also make time for refinancing and resetting old deals. Our data shows that, in 2021, mid-sized firms were the most effective at this balancing act
When market conditions are as healthy as they have been for the past 12 months, it must be tempting to pursue CLO new issues above all else. But CLO issuers have not neglected their older deals, with 2021 US refinancing volumes hitting $106.4 billion and reset volumes reaching $106.67 billion, as Creditflux goes to press.
Touching up legacy deals is a delicate balancing act. For the largest US CLO managers, great AUM comes with great responsibility to rework old deals. These firms will have easiest access to the capital markets, but they may be reluctant to make repeated trips to the market at the risk of weaker execution. Furthermore, large managers face the pressure of keeping on top of mountains of deals with only the cushion of a two-year non call period.
For small CLO issuers, it is important to price new CLOs in order to reach critical mass. It’s often said that at least five CLOs (and over $2 billion in assets) are needed to run a US CLO business efficiently.
Perhaps then, it is no surprise that, pound-for-pound, the best CLO reworkers are managers that fall somewhere between those two extremes (weighted towards the larger end of the CLO manager universe).
Repricing waves 2017-21
Source: CLO-i
Looking after old deals
BlackRock and Sound Point Capital Management each have a strong claim on being the most prudent when it comes to ensuring the efficiency of older deals. BlackRock has reworked 87.5% of its eligible US CLOs since the start of 2017. With $10.7 billion of US CLOs under management, it is the 25th largest US manager.
Sound Point is just a shade behind at 83.33%, but its AUM tally is higher at $16.26 billion. MJX, Neuberger Berman, Redding Ridge and Bain also work hard at reworking old deals. They rank as the eighth, 11th, 15th and 16th largest US CLO managers, yet they each have a reworking rate of over 70%.
The top two US CLO managers by AUM have reworked a respectable amount of deals, with Credit Suisse Asset Management (CSAM) notching a 64.71% rework rate while CIFC Asset Management has reworked 61.11% of its eligible US CLOs.
The average rework rate among US CLO managers with more than $15 billion in AUM is 63.3%. This figure falls slightly to 57.95% for managers with $10-15 billion in US CLO AUM, but picks up to 65.18% for mid-sized firms with $5-10 billion. The smallest CLO managers average 65.97%, although this is where the range of results is widest.
The leading US CLO issuers in 2021 — Blackstone Credit and Carlyle Group — are below average at 55.56% and 40%, respectively, over the past five years. In 2021, however, their output is more balanced, with Blackstone reworking 10 deals (to 14 new issues) and Carlyle reworking 12 (to 11 new).
* Includes static, revolvers, bond-flex and triple C flex CLOs. Resets (including reissues) and refis include repricing of pre-2017 CLOs ** Missing cost of debt for 1 CLO
The right to refi and reset a CLO lies in the hands of the equity investors, so managers do not have the direct ability to rework their deals (although they can initiate a process by contacting their investors). The exception to this is the growing number of captive CLO equity funds, which give managers ownership of their equity and complete control over issuance patterns and refi/reset options.
AGL, Brigade, Elmwood, GoldenTree and Marble Point are the elite group of mid-sized firms ($5-10 billion AUM) to have reworked each of their callable CLOs. Among this group, Brigade stands out as it typically sells all the equity in its CLOs (to a lesser extent, Elmwood does too) and head of CLO capital markets Justin Pauley says that forward planning is crucial given the amount of CLO volumes being produced.
“Pipelines are an important concept,” he says. ”We talk to the equity investors in our new deals about timing to manage our pipeline and ensure the best possible execution for all of our investors regardless of it being a refi, reset, or new issuance.”
Brigade, which has priced five new US CLOs and repriced five US CLOs this year, proactively looks at its callable CLOs in order to stagger issuance. 16 days was the shortest time period in the manager’s issuance programme this year, with new issue Battalion XVII pricing on 1 February and Battalion X being reset on 17 February.
16 days
The shortest gap in Battalion’s issuance programme in 2021
Reset versus refinancings
Although there has been a roughly even split between refis and resets this year, some managers have favoured one option over the other. The choice between these two reworking options is most dependent on the shape of the CLO term curve (steepness makes short-dated transactions more compelling) and this fluctuates on a regular basis.
CSAM and MJX have been big believers in refis in 2021, with the pair choosing this option more than 10 times each compared to just two resets. On the other side is AGL, which reset six CLOs in 2021 without refinancing a single deal.
AGL is one of the rising stars in CLO management, notching up $6.6 billion of CLO AUM since its debut in October 2019. Just two years on (or the length of a traditional non-call period) it has reworked each of its eligible CLOs. Much of its new issuance was centred on the 2020 vintage (hence the high average funding costs on its CLOs prior to resetting: 209bp), which lends itself to short-dated CLOs which can be reworked in relatively short timeframes.
“Pipelines are an important concept”
Justin Pauley, Head of CLO capital markets | Brigade Capital Management
Still, the New York-based firm’s run of resetting each of its CLOs is a remarkable achievement. Newer CLOs inevitably face higher financing costs, but they could avoid this by creating short-dated CLOs from the outset. The option then resides in reworking these CLOs relatively early in their life, during which time the manager can put together a track record which, if successful, lends itself to tighter execution if it decides to reset into a longer-term structure.
High costs make 2020 a priority
Given their historically high financing costs, 2020 vintage deals are the most obvious call candidates. Because that year was followed by one in which CLO spreads plummeted to some of their tightest levels in over a decade, calling these deals was an attractive proposition in 2021.
In this regard, Blackstone boasts the proudest record, having reworked all three of its 2020 CLOs. On top of that, the firm was one of the first to issue a CLO after the coronavirus spread panic in credit markets.
On the flip side, Golub Capital Partners also issued three 2020 US BSL CLOs, but it has yet to rework any deals. However, there are extenuating circumstances: one CLO priced pre-pandemic (early March 2020), another priced in October 2020 and has just become callable, while the third priced in December 2020 and is still locked, as Creditflux goes to press.
Funding cost of Nassau 2020-1, now the year’s most callable deal
As things stand, the 2020 CLO with the highest cost of debt (ie, the most callable deal) that has yet to reprice is Nassau 2020-1, although it is marketing for a reset via Citi, as previously reported by Creditflux. The CLO priced in July of that year with funding costs of 277.8bp.
Among CLOs that are still in their non-call periods, the deal with the highest cost of debt belongs to the 2019 vintage in the form of Zais CLO 13. That deal, with a 226.5bp cost of debt, is unusual in that it had a three-year non-call period (expiring in July 2022) alongside the standard five-year reinvestment period. It also has five classes of fixed-rate debt, going down as low as the triple B-rated notes.
US CLOs eligible for repricing vs cost of debt (bp)
Window closes for ultra-tight CLOs
199 US CLOs priced in 2018, but just 49 have been reworked in some way. The value of the call option in these CLOs is arguably lower than normal because this particular vintage is famed for producing the tightest 2.0 CLOs.
To put that in perspective, the unworked CLOs from this vintage have an average cost of debt equating to just 158.7 basis points, while the cost of debt for five-year reinvestment CLOs in 2021 is 168.19bp.
The tightest execution on a 2.0 CLO is a title held by Blackstone’s Cook Park, from March 2018. The CLO’s triple A notes priced at a record 92bp for a five-year CLO, while the overall debt package came it at a miserly 134bp. That deal structure seems ideally placed to invest through a credit cycle without refinancings or resets.
Blackstone’s Cook Park has the tightest 2.0 CLO triple A notes
Moving to a new benchmark
Brigade’s Pauley says that new issue CLOs will be popular in 2022 even as deals transition from Libor to Sofr. But given most new CLOs in 2021 have been structured with two-year call locks, a large proportion of the market will be unable to be refinanced or reset in early 2023, ahead of the June 2023 Libor cessation date.
”The refis and resets in early 2023 are unlikely to result in big structural changes — the primary motivation will be to switch the benchmark to Sofr,” says Pauley.
  • Data includes US CLOs backed by broadly syndicated loans that were priced between 2017 and 2020. Static deals, bond flex CLOs, triple C flex CLOs, middle market CLOs and reissues are excluded.
  • Repricings include partial refinancings, full refinancings and resets.
  • Reworkings include repricings and redeemed CLOs.
  • Status of deals is as of 3 December 2021.
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Global credit funds & CLO's
January 2022 | Issue 241
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