Global credit funds & CLO's
November 2023 | Issue 259
Published in London & New York.
Copyright Creditflux. All rights reserved. Check our Privacy Policy and our Terms of Use.
Share this report:
November 2023 | Issue 259
Analysis
CLOs
The wall is coming down
Poh-Heng Tan
Refis and extensions have greatly reduced the height of the maturity wall looming over European CLOs in the near term — but, further out, WAL test cushions remain critical
Drawing upon data from European CLOs 2013-22, the underlying collateral maturities for 2024 have witnessed a year-to-date decline of 67% (or close to €22bn), a figure attributable to refinancings and extensions, as well as the redemption of CLOs.
Consequently, just over 90% of underlying CLO collateral debt is now slated to mature from 2026 onwards. This adjustment provides borrowers with breathing space, enabling them to navigate what most market participants presume will be a challenging operating environment in the forthcoming 12-18 months — characterised by elevated borrowing costs and a deteriorating macroeconomic backdrop.
Table 1 (below) offers a breakdown of the reduction in 2024 and 2025 maturities, categorised by manager. Fifteen managers decreased their 2024 and 2025 maturities by at least €0.5bn each, collectively contributing to a €12.4bn reduction.
European loan maturity wall (€bn)
Importance of WAL cushions
Table 2 enables us to dig a little deeper. It shows collateral maturities and asset notional amounts for European CLOs, segmented by weighted average life (WAL) cushion.
Rating agencies use the WAL limit test when determining the structure of a CLO. Longer credit duration corresponds to higher default risk — so, generally speaking, an extended WAL limit necessitates greater credit support to achieve a specific rating.
Referring to table 2, €8.5bn or slightly over 60% of European CLO underlying assets with 2025 maturities are housed in European CLOs that have greater than 0.5-year WAL cushions. Simultaneously, €32.4bn or around 67% of European CLO underlying assets with 2026 maturities are in deals that have greater than 0.5-year WAL cushions.
These percentages stack up favourably when juxtaposed with US CLOs: 40% and 44% of US CLO underlying assets with 2025 and 2026 maturities, respectively, are housed in US CLOs that boast a greater than 0.5-year WAL cushion.
Generally, a CLO can continue to purchase assets after its reinvestment period if it either maintains or improves its WAL test and passes its overcollateralisation (OC) tests. In fact, it is common for European CLO managers to reinvest, especially during the first two years of the post-reinvestment period. CLOs can typically also participate in maturity amendments of underlying loans, provided that a WAL test is either maintained or improved. However, these conditions are often waived if maturity amendments are related to workouts or restructurings, or if a CLO manager deems a move necessary to prevent defaults or minimise significant losses.
Source: Intex, CLO Research
Source: Intex, LPC, CLO Research
* Fixed-rate assets are excluded from the calculation
Source: Intex
Underlying asset prices
Table 3 provides additional asset price information for the 2024-26 maturity wall. Asset price information is important, as not all assets need to be extended. If an asset is quoted close to par, then there is the option of refinancing to address its maturity date.
Assets maturing in 2024 and 2025 necessitate more immediate attention, and, to some extent, those maturing in 2026 do as well. As of 16 October 2023, approximately €1.4bn of assets maturing in 2024 were quoted at below 98. Around €6.1bn of assets maturing in 2025 were quoted below this price.
About €0.3 billion of assets, quoted between 90 and 98 and maturing in 2024, are in CLO deals with less than 0.1 year of WAL test cushion. Meanwhile, €1.4bn of assets, quoted between 85 and 98, and maturing in 2025, are in CLO deals with less than 0.1 years of WAL test cushion. Consequently, up to €1.7bn of discounted assets may not be easily extended — they reside in CLO deals with very limited WAL test cushions, which means CLO managers may not be able to vote on maturity amendments.
Assets quoted close to par are more likely to be refinanced and therefore less pressured to engage in an amend and extend. Regarding deeply discounted assets, the concern is perhaps predominantly credit-related. Generally speaking, the WAL requirement may be relaxed if the extension is associated with debt restructuring.
Advantages of robust WAL test cushions
From the CLO equity standpoint, amend and extend activities are beneficial because they enhance CLO underlying collateral spreads — which puts CLOs possessing robust WAL test cushions at an advantage.
It is encouraging to witness the year-to-date (YTD) upward trend in the floating spreads of collateral for EU CLOs, as observed in a sample of 2021 vintage deals (see table 4). The improvement in the underlying collateral’s weighted average spread also plays a crucial role in generating the necessary interest income to potentially offset future collateral losses resulting from defaults or trading.
From the CLO debt holders’ perspective, amend and extend activities will use up the WAL cushion anyway, as in the normal course of CLO business. In other words, CLO managers would still roll into longer-dated assets via the primary or secondary market as shorter ones exit the collateral pool, even if these moves are not related to amend and extend activities.
Share this article:
