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Opinion CLOs
The market will not look kindly on managers that don’t reset their deals
by Thomas Majewski
Thomas Majewski
Founder & managing partner
Eagle Point Credit Management
In today’s CLO market, the choice is stark: reset or slowly perish
Waves of CLO refinancings; a record number of CLO resets; majority equity investors exercising their call rights. The past 18 months have seen a surge in CLO debt paydowns, which has spurred strong demand for new CLO debt as investors look to redeploy their cash.
With CLO triple As largely tightening throughout 2024 despite the record issuance numbers, CLO resets were consistently accretive to both CLO equity investors and CLO collateral managers alike — and the numbers reflect it, with 43 resets done in 2023 compared to 451 in 2024*. Frankly, not focusing on resets during this period is, in our opinion, a CLO collateral management crime.
As stewards of CLO equity capital, CLO collateral managers must capitalise on periods in which the refinancing option is in the money. As loan spreads compress, it is important that the same or more be applied to CLO debt liability costs, to keep CLO equity payments in line with current payments (or better). The longer the reinvestment period you can extend, the greater your optionality will be in a market shift that places the reinvestment option more in the money.
Size doesn’t matter in resets
With this in mind, it’s report card time: which CLO collateral managers were most active in resetting their CLOs — and, in effect, most responsible to their CLO equity investors? One might guess that larger CLO collateral managers, which have better market access, had better success. Or were smaller CLO collateral managers nimbler in addressing their capital structures? The numbers conclude that size does not matter.
As you can see from the table below, since 2024, the change in AUM of reinvesting CLOs has differed substantially across similar-sized CLO collateral managers. 100% of CLO collateral managers want to reset 100% of their CLOs — after all, it extends their fee revenues by up to a decade each time. So why are some more successful than others? What does this mean for their future success?
First, resetting sends a clear message about investor demand. The CLO collateral managers whose AUM has been extended most have equity investors who want to extend those CLOs, which may require an additional capital injection at the time of reset. CLO equity investors won’t throw more capital after bad performance, so the correlation we see between CLO equity performance and reset velocity is not surprising. CLO debt investors will be most interested in rolling their investments upon a reset if they’ve enjoyed strong performance. Otherwise, a reset is an opportunity for them to get par back and redeploy their dollars someplace better.
Second, an inability to reset can lead to substantial AUM loss, and reduced fee revenue for CLO collateral managers. Extensions allow fees to continue during the reinvestment period, providing those managers with predictable cashflows that support their operations and competitive positioning.
This dynamic creates a virtuous cycle: CLO collateral managers which successfully extend reinvestment periods maintain higher AUM for longer periods, generating more stable fee revenue that can be reinvested into team building, technology and business development. Conversely, CLO collateral managers which fail to extend deals face accelerating AUM declines as structures enter their amortisation phases. This means less revenue, less capital investment from management and can even lead to the loss of key people.
The differences here are meaningful and should not be ignored. The distinction is a referendum on CLO performance, allowing investors to quickly stack up which CLO collateral managers handle the liability side of the ledger best and perform on the asset management side as well. At the same time, this is a sign of the future, in which the same CLO collateral managers that underperformed in resetting will likely underperform in collateral performance, as they see their resources and trading abilities dwindle.
In today’s CLO market, the choice is stark: reset or slowly perish. As the CLO market continues to evolve, reinvestment period extension through resets has evolved from a tactical advantage to a competitive necessity.
*Source: Pitchbook LCD. As of 31 December 2023 and 31 December 2024.
