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Global credit funds & CLO's
March 2024 | Issue 262
Published in London & New York.
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March 2024 | Issue 262
Analysis CLOs
How many CLOs will be reset?
Tom Davidson
Managing editor
Tightening liability spreads aren’t just driving record new CLO issuance this year — they’re also triggering a wave of resets and refinancings in the US, especially for broadly syndicated CLOs
The CLO market had another spectacular month in February. By our count the US BSL market saw 32 new deals price, along with the same number of resets, refis and reissues. Europe also had a strong month for new issuance, with 11 CLOs pricing. But it only saw one refi and one reissue. As a result, this article will focus on the US market to ask a simple question: how much further will the reset wave go?
Another 10bps makes a huge difference
However, forecasts are tricky, as many older deals are teetering on the edge of viability, especially for refinancing. Even a small further tightening of senior spreads could bring big changes, says Olga Chernova, CIO of Sancus Capital Management.
“It has been a busy year for refis and resets, and that will continue. With triple A spreads at 150bps, 40% of the market is already in the money. With another 10bps rally in triple A spreads, 90% of the market would be able to refinance.”
That 10bps of tightening for US BSL CLOs seems be on the cards. The consensus in the market is for around that much movement by the end of the year.
Our review of February’s refinancing activity points to another challenge in making predictions: the complexity and idiosyncrasies of the CLO market. The batch of resets that hit at the end of 2023 and the start of 2024, were generally from a handful of recent vintages, especially short-dated deals from 2022. As spreads continued to tighten that changed. In February 20 CLOs were reset and 11 refinanced. But only a third of those were from 2020 or later vintages.
Instead, a wide variety of older deals hit the market. At first glance none of those deals should be obvious targets for a reset or refinancing. As our chart (left) shows, most were originally priced well below the current new-issue level for even the best tier-one managers. But almost all were also out of their reinvestment periods and effectively static (or at least mostly so). That helped them to price very tight to the new-issue market. In some cases in February those spreads were as low as 115bps, levels the market hasn’t seen in years.
All data as of 31-Dec-2023. Source: Creditflux
Source: CLO-i
Less seasoned deals are easier to reset
So what is driving the choice between a reset and a refi? The answer seems to be much as you’d expect. According to BNP Paribas research, resets are generally used for cleaner and less seasoned deals than refis. According to one CLO manager that makes sense. Many older deals have deteriorating portfolios and require potentially large equity injections for a reset to work.
115bps
Reset and refi spreads plunged lower than they have for years
That mostly held true in February. The oldest deal last month was Sculptor’s 2012 vintage CLO OZLM Funding II, which was refinanced with the triple-As pricing at SOFR plus 120bps. The deal has had an interesting run, including a refi in 2016, a full reset in 2018 and then a further refi in 2020 before this latest activity.
The 2014 vintage Madison Park Funding XIV, managed by CSAM, was refinanced, as was CVC’s Apidos CLO XVIII-R. Benefit Street bucked the trend, with its 2014 vintage deal being reset. But that deal is an outlier, and has already been reset twice. The latest iteration is short-dated, with a one year non-call and a two year reinvestment period.
Whether you are looking at a refi or a reset, the newly open market opens up a range of opportunities and challenges for investors. David Nochimowski, head of global CLO & ABS strategy at BNP Paribas, says: “The surge in CLO refi/reset activity should translate into secondary opportunities, especially for mezzanine tranches. We like two specific profiles. Triple Bs with high coupons (trading at a premium) from deals with low triple A coupons offer extension potential. Triple Bs with low coupons (trading at a discount) from deals with a high triple A coupon offer call potential via a reset.”
Last month we asked Gretchen Lam, CEO of Octagon Credit Investors about the challenges for secondary investors trying to work out which deals will be called. She said: “Dust off the screeners, we’re back! I think that question is perhaps most interesting for single B investors, where given how thin that tranche can be, you’re either covered or you have a 20% recovery. For that tranche, I think the call versus not decision, or the reset versus not decision, is going to be most impactful.”
We look at the factors behind why a CLO may be called overleaf (How many CLOs will be called this year?).
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