Refi wall looms over CLOs as a fifth exit reinvestment

Sayed Kadiri

Editor

Loan and high yield issuers have a decent runway before they have to think about refinancing their debt, but CLO issuers are not sitting quite as comfortably.

Maggie Wang, global head of structured products research at Citi, says about $85 billion of US CLOs have left their reinvestment periods this year, which is 9% of the market. Next year, just over $200 billion of CLOs (22% of the market) will roll out of reinvestment periods.

By contrast, most corporate credit issuers have a couple of years before they need to refinance their debt, according to a London-based credit portfolio manager.

Poh-Heng Tan, chief executive officer at CLO Research, says it is demoralising for a CLO manager to lose AUM. “It is a volume game, and a lot of managers will be under pressure to reset,” he says.

“CLO equity investors can still extract value from short-dated CLOs”

Maggie Wang, Global head of structured products research | Citi

European CLOs appear to be under less pressure, with slightly over €20 billion of CLOs rolling out of their reinvestment periods in a year’s time, he says.

Even if CLO spreads tighten to the extent that resets come into the money again, performance could still present a barrier to the capital markets.

“Equity NAVs [net asset value] for most CLOs are either negative or in the single digits for seasoned deals, and that means we could see CLOs fall short of their modelled 12% equity IRRs,” says Poh-Heng.

He points out that 2.0 CLOs are dependent on final NAVs in order to deliver strong overall returns. By comparison, 1.0 CLOs relied on high cash-on-cash returns.

However, New York-based Wang argues there is still some runway for CLO equity investors because they can extract value from short-dated CLOs. “Generally, interest cashflows for short-dated CLO equity have been strong and that is likely going to be supportive of valuations,” she says.

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Global credit funds & CLO's

November 2022 | Issue 250

Published in London & New York.