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February 2022 | Issue 242

I’ll see your 2020 and raise you 2021

Charlie Dinning
Data journalist
Tanvi Gupta headshot
Tanvi Gupta
Head of data journalism
Sam Robinson
Head of research
Discounted loans, Libor floors and bond flexibility helped make 2021 an even better year for CLO returns than 2020, as US CLOs distributed 15.54% and European CLOs paid 13.93% annualised
2020 was an outstanding year for CLO equity distributions, as the coronavirus pandemic created a bout of loan market volatility which was conducive to CLO returns. But it has been trumped by 2021, which delivered even higher returns — and was also a record year for all forms of CLO issuance in the now $1 trillion-plus global CLO industry.
Creditflux’s report on CLO equity returns one year ago showed that US and European new issue CLOs that went effective in 2018 and 2019 averaged equity payments of 13.71% and 13.22% annualised, respectively, in 2020.
CLO managers have followed that with an even better year. US and European CLO new issues that went effective in 2019 and 2020 were the focus and they averaged 15.54% and 13.93% annualised to equity last year, respectively (excluding repricing payments).
2020 CLOs averaged higher annualised payments than their 2019 counterparts in both markets. 2020 European CLOs averaged 14.17% annualised across 2021, compared to 13.66% for 2019 CLOs. In the US, the increase was more dramatic, rising to 16.46% annualised from 14.9%.

Neil Desai, head of structured credit investments at WhiteStar Asset Management says that “the 2020 US CLO vintage had the best first year of interest payments to equity of any CLO vintage post the great financial crisis”.
2019-20 US CLOs: 2021 annualised payments to equity vs OC cushion*
*OC cushion as of Dec-21. Average of annualised payments excludes repricing payments
**Change in OC cushion from Dec-20 to Dec-21. Excludes resets
Discounts add up to outperformance
2020 US CLO equity payments were helped by two factors: Libor floors and a distressed loan market at purchase. Both played a part in 2020 CLOs paying out high figures, but Serhan Secmen, head of US CLO investments at Napier Park Global Capital, says that the discounted loan market had the bigger role.
“Of all the factors that affect CLO equity performance when structuring a deal, the purchase price of the loans happens to be the most important,” he says. “To illustrate the point, assume an extreme hypothetical situation where an investor can purchase a loan portfolio at 90 cents and issue debt tranches at par. If the leverage is set around 10-times, then the investor would not need any additional equity capital to structure the deal — which makes CLO equity a very low cost option on the loan prices.”
2019-20 Euro CLOs: 2021 annualised payments to equity vs OC cushion*
*OC cushion as of Dec-21. Average of annualised payments excludes repricing payments
**Change in OC cushion from Dec-20 to Dec-21. Excludes resets
Secmen says collateral in many 2020 vintage CLOs were sourced in the mid-90s, so they could flush principal to the equity investors when loan prices normalised.
The amount of par created by the rallying loan market meant that when CLO equity investors opted to reset or refinance deals, they had options. They could either flush the principal back to investors to front-load their payments and increase the deal’s internal rate of return (IRR). Or, some of the par flush could be left in the deal to upsize the CLO, creating larger equity payments down the line. This approach is the equivalent of putting in new equity capital for the cost of a reset.
2020 CLOs also generally had lower leverage than past vintages, due to volatility at the time of pricing and higher liability costs. This meant that choosing to upsize the CLO at the time of a reset would lead to higher leverage and more attractive returns later on, according to sources.
“It’s the best first year since the crisis”
Neil Desai, Head of structured credit | WhiteStar
GoldenTree Asset Management again topped the US CLO equity payments table. Its 2019 and 2020 US CLOs paid 22.65% annualised, excluding refi and reset payments, on average. Last year, GoldenTree’s 2018 and 2019 CLOs paid 18.15% annualised.
Fortress Investment Group is close behind GoldenTree. It also averaged above 22% annualised, while Fidelity Investments rounded out the top three at 20.54%. Fortress and Fidelity have shot up the table compared to their positions last year, rising from 69th and 80th, respectively.
Maximising bond buckets
Angelo Gordon generated the highest average equity payments in Europe across its 2019 and 2020 CLOs last year, averaging 27.64% annualised to its two eligible CLOs.
The firm was able to take advantage of the bond market in its portfolio thanks to having high limits for fixed-rate debt and for bonds. According to Steven Paget, portfolio manager for European performing credit, bond flexibility helps in a number of ways. “Bonds have call protection, meaning you are able to sell above par when the credit performs and/or the market tightens, whereas loans will generally get refinanced when they are above par.” This, he argues, allows managers to build par in a portfolio when bonds are included.
“Additionally, the relative value between the loan and bond markets shifts over time,” says Paget. “Active portfolio management — including selling loans against bonds or bonds against loans, depending on where the value is — can lead to improved performance and par build.”
Lastly, settlement times for bonds are shorter than for loans, meaning the assets settle and pay a coupon into the CLO more quickly, which improves equity payments.
“Selling loans against bonds can build par”
Steven Paget, Portfolio manager | Angelo Gordon
Man GLG and Credit Suisse Asset Management were second and third in highest average annualised payments at 19.43% and 17.87%, respectively. Napier Park had the largest increase from last year’s report, rising from 42nd to 7th. Hayfin was just behind as it increased its standing from 43rd to 10th.
While CLO managers in Europe used bonds and their shorter settlement times to make their deals run more efficiently, US CLO managers increasingly turned to negative cash balances to overcome shortfalls.
Market sources say that the balance of excess traded cash in CLO portfolios went from 0% to -3% on average in the market last year. But this is still only around $15 million on average for a CLO.
Desai says negative cash balances help “the CLO run more efficiently as you’re effectively putting more than a dollar to work. If a new issue loan won’t settle for a month you can remain overinvested on a traded basis in order to increase interest collections and reduce cash drag to the equity.”
  • Data includes CLOs that went effective in 2019 and 2020.
  • Bond-flex CLOs, middle market CLOs and reissues were excluded.
  • Annualised return (%) is calculated assuming equity issued at par.
  • Manager current OC cushion: OC result of junior-most test minus respective trigger, as of December 2021 trustee report.
  • Manager change in OC cushion: average change in junior-most OC test cushion from December 2020 to December 2021.
  • All data is taken from CLO-i and Moody’s Analytics.
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Global credit funds & CLO's
February 2022 | Issue 242
Published in London & New York.
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