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July 2021 | Issue 236
Analysis
CLOs
Coronavirus tiers up old ranking script
Charlie Dinning
Data journalist
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
Forget everything you thought you knew about CLO manager tiers. Apollo and Blackstone are mainstays, but smaller, more nimble issuers are finding new ways to stand out from the crowd
It has often been thought that the largest CLO managers, which lock in the cheapest triple A spreads, are considered tier one. But debt execution and assets under management (AUM) are now just two of many factors contributing to tiering calculations, according to sources.
Edwin Wilches, portfolio manager at PGIM, says tiering is more nuanced and points to three factors in the market today: portfolio-based, secondary liquidity and manager standing.
Eagle Point Credit Management’s Dan Ko agrees and says his firm focuses on credit performance, as periods of extreme volatility enable investors to find out more about how CLO managers perform. The ways in which CLO managers built par last year, managed triple C buckets and covid-affected names, and traded, are far more important than their funding costs, he says.
“People are thinking about tiering a lot more and there has been a re-tiering based off last year’s performance,” he says.
He adds, though, that not everyone subscribes to the same re-tiering. “If a collateral manager was tier one or two in credit performance, but still receives wider pricing in the market, I’m going to buy that CLO manager’s paper all day long, and vice versa if the manager is priced too tight compared to its credit performance.”
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US CLOs: triple A spread percentiles
Source: CLO-i
Blackstone and Apollo cement status
There has been a clear shift in attitude towards managers. In 2018, the top decile was dominated by the largest US CLO issuers. The top six US CLO managers in AUM at the end of the year — Blackstone, CSAM, Carlyle, PGIM, Ares and Redding Ridge (Apollo) — were in the top bracket along with Barings, BlackRock and Eaton Vance.
However, in 2021, only Blackstone and Redding Ridge have remained in the top decile of triple A debt execution. Smaller US CLO managers such as Allstate, Invesco and Napier Park have broken through.
This reshuffle might have been triggered by Norinchukin Bank, which has stepped away from the CLO market in the past couple of years. The Tokyo-based institution had a pre-approved list of CLO managers, based largely on AUM, which artificially set benchmark levels.
10bp
Amount Apidos XXXV was tighter than market average
CVC Credit Partners printed the tightest triple A tranche in comparison to the market this year. Apidos XXXV was over 10 basis points tighter than the 15-deal rolling average when it priced in February at 105bp. The CLO’s triple A tranche attached at 37%, which at the time was slightly below average, with Napier Park printing Regatta XVIII two days later and pricing its senior-most notes at 110bp, but with 39% par subordination.
1bp equals 1 point for CLO triple As
The combination of par subordination and pricing levels is an important factor in tiering because investors prefer the extra protection that comes with increased par subordination. Sources indicate that one extra point of subordination is worth an extra basis point on the tranche.
The increasing numbers of nimble managers climbing up the tiers has not been the only shift over the past year. Dispersion within tiers has become more pronounced since pandemic-induced volatility rocked financial markets 16 months ago.
“If a collateral manager was tier one or two in credit performance, but sees wider pricing, I’m going to buy their paper all day long”
Dan Ko, Portfolio manager | Eagle Point Credit Management
In 2018, the difference between the tightest print and widest print in the top decile was just 3.1bp, and was between 5.2bp and 5.3bp for tiers two to four. But in 2021, the dispersion in the top decile has jumped to 5.9bp and it is even more pronounced in the bottom decile, where there is an 11.6bp difference between top and bottom.
Manager style also has a marked effect on where they price in comparison to the rest of the market. Aggressive managers that target higher paying loans often price wide of the market but are not necessarily considered a lower tier, according to sources.
MJX Asset Management has on average priced 8bp wide of the market in 2021, but its weighted average spread is on average 4% and its 2018/19 effective US CLOs averaged 16.1% annualised to equity last year amid the volatility. One CLO investor singled out aggressive managers such as MJX and Nassau Corporate Credit, as favoured by equity investors rather than debt investors.
5.9bp
Dispersion among the top decile in 2021; up from 3.1bp in 2018
Tier one means 4% liquidity pick up
It is not a given that tight execution on the triple A tranche means tight execution on the mezzanine tranches in CLOs.
Of the eight US CLO managers in the top decile by triple A execution, four are in the top decile for average funding costs. CVC, Allstate and Blackstone have achieved the three tightest costs of debt against the rest of the market in 2021, coming in 18.5bp, 14.5bp and 10.7bp tighter on average.
Wilches points out that the secondary market can play a part in this. “For the benchmark issuers, you’ll see some investors stepping in pretty aggressively to buy those primary bonds as they are perceived to be more liquid in the secondary market relative to a more off-the-run manager.”
The nine US CLO managers in the top decile have had $347 million of double B-rated bonds from their portfolios listed in the secondary market this year and $278 million has traded (a clearance rate of 80%). On average, the trade percentage of double B-rated bonds this year is 76%.
*as of Q1 2021
Methodology
Dataset
  • US CLOs priced in 2018, 2019, 2020 and 2021 with reinvestment period of 4.5 years or longer and non-call period of 2 years or longer.
  • Bond flex and triple C flex deals have been excluded.
Triple A market average (bp)
  • Market average is calculated on the basis of a 15-deal rolling average around the pricing date for each deal.
  • Manager’s market average is derived from an average across each manager’s deals in the dataset for the vintage.
Tiering
  • Managers are divided into four groups based on ‘triple A versus market average’ percentiles.
  • Tier 1 consists of manager under 10th percentile, tier 2 between 10 and 50, tier 3 between 50 and 90 and tier 4 for those over 90th percentile.
WAS (%)
  • Average for 2018, 2019 and 2020 deals in the dataset taken from trustee reports published on (or closest available report to) April 2021.
2020 Equity returns (%)
  • Annualised return (%) over 2020 for all US CLOs that went effective in 2018 and 2019.
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Global credit funds & CLO's
July 2021 | Issue 236
Published in London & New York.
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