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Analysis CLOs
Slow and steady wins the day
by Poh-Heng Tan
It’s often thought CLO managers add value to their deals via high volume trading strategies. The data shows this can be true — but on average, top performing CLOs are less actively traded
Conventional wisdom asserts that actively managing a CLO portfolio improves its performance. This belief hinges on the idea that active strategies enable managers to optimise portfolio composition, mitigate risks and capitalise on opportunities as they arise. However, our in-depth analysis of both European and US BSL CLO deals from the 2021 vintage challenges the prevailing market sentiment, particularly in terms of preserving capital.
1: US BSL CLO trading activity vs MVOC performance*
*All data is for 2021 vintage CLOs
CLO managers are able to sell any asset on a discretionary basis at any time except during a restricted trading period and subject to an annual percentage limitation. But these constraints do not typically present significant challenges. Managers can justify trades based on credit improvements or risks, in addition to the discretionary trading limit. So, in most cases, they can dispose of any credit-risk obligation or credit-improved obligation at any time without restriction.
So with these flexibilities in mind, the question remains: does active trading contribute to capital preservation?
25
%
US deals with <12% annualised asset sales that are top performers
2: European BSL CLO trading activity vs MVOC performance*
*All data is for 2021 vintage CLOs
Comparing MVOC and trading volume
To address this question for the US market, the relationship between trading activity and a CLO deal’s MVOC performance (based on asset prices as of 29 November 2024) was examined using a dataset of 329 US BSL deals that closed in 2021.
8
%
EU deals with >30% annualised asset sales that are top performers
MVOC, which is often employed as a measure of collateral health, is a reliable proxy for assessing capital preservation efforts. (The use of MVOC as a metric was covered in ‘Triple C assets and capital preservation’, Creditflux, November 2024 issue) Meanwhile, annualised asset sale volume provides insight into a strategy’s level of active management.
The findings for the US market are summarised in chart and table number 1.
It demands significant discipline to resist selling a credit into weakness during periods of market volatility
In US CLOs, trading hurts performance
The data reveals a subtle trend: median trading volumes tend to increase marginally as MVOC performance declines across quartiles. Specifically, the median deal in the top MVOC quartile exhibited less trading activity compared to the median deals in the other three quartiles. Conversely, the median deal in the lowest MVOC quartile recorded the highest trading activity at 23%. The average deal’s trading volume in each quartile is also quite similar, with the average deal in the lowest quartile exhibiting a higher level of trading activity.
What about the percentage of actively managed deals across the four quartiles? As shown in table 1, actively managed deals with an annualised sale volume exceeding 30% represent approximately 16–20% of deals in each quartile. Interestingly, and somewhat contrary to market expectations, deals that are less actively managed, with an annualised sale volume of less than 12%, have a higher likelihood of being in the top or second quartile.
This highlights the crucial role that initial credit decisions play in preserving capital. While trading has the potential to add value, it can just as easily diminish it, depending on execution and circumstances. Ultimately, the outcome depends on the manager’s credit expertise. Some might argue that it also demands significant discipline and conviction to resist selling a credit into weakness during periods of market volatility.
Most top managers aren’t active
Among the 25 managers in the top quartile based on MVOC performance across their 2021 vintage deals, only five have been more active in trading, with an annualised sale volume exceeding 30%. These are Clover, Diameter, Hayfin, Onex and Napier Park.
On the other hand, six managers in that quartile have been significantly less active in trading, with an annualised sale volume of less than 12%. These include Allstate, Aegon USA, New York Life, Golub Capital, Neuberger Berman and New Mountain Capital.
Managers with approximately 18–21% annualised asset sales in the top quartile by MVOC include Oak Hill Advisors, Birch Grove Capital and Whitebox Capital.
16
%
US deals with >30% annualised asset sales that are top performers
Europe shows similar trends
Next, we move to the European CLO landscape. A sample of 95 European CLO deals that closed in 2021 was analysed. The findings are summarised in table and chart 2.
Unlike the findings in US CLOs, the median deals in the top two MVOC quartiles exhibited similar trading activity levels, with annualised asset sale volumes of 17–18%. However, the median deal in the lowest MVOC quartile showed the highest trading activity, while the median deal in the third quartile recorded the lowest.
Once again, the average trading volume tends to increase as MVOC performance declines across quartiles, with the average deal in the lowest quartile exhibiting the highest level of trading activity at 27% — approximately 10 percentage points higher than the average deal’s volume in the top quartile.
Specifically, deals in the top MVOC quartile showed lower trading activity on average compared to those in the other three quartiles. A similar trend is evident at the 75th percentile, where trading activity increases as MVOC performance decreases.
This pattern may be attributed to managers actively de-risking their portfolios by selling underperforming or deteriorating credits in less “clean” portfolios, reducing WARF and triple C exposure. Cleaner portfolios might experience less pressure to sell.
Trading is not free, given the bid-ask spread and transaction costs. Frequent trading can signal a lack of conviction or a reactive approach, both of which might undermine long-term performance. That said, there are deals with a high level of trading volume (over 30% annualised asset sales) in the top quartile by MVOC — however, such deals are more likely to appear in the lower quartiles by MVOC.
Again, this highlights the importance of initial credit decisions in capital preservation and the ability of a manager to navigate periods of market volatility with discipline and conviction.
Among the eight managers in the top quartile for MVOC performance across 2021 vintage deals, none demonstrated higher trading activity, with an annualised sale volume exceeding 30%. Conversely, two managers were notably less active, with annualised sale volumes below 12%.
Source
- All data is for 2021 vintage CLOs.
- Source for all data: CLO Research, Intex, S&P Global Market Intelligence.
