Q4 US CLO outlook — New structures and the roll/rotate/liquidate dilemma
- Charlie Dinning
The recurring question in the US CLO market, and indeed in Europe, is “does the arb work?” and for most of the year the answer, for third party equity investors at least, has been “no”.
Most CLOs printed this year have been achieved using captive equity funds, sources say. This has been driven by expensive liabilities, specifically triple-As and double-Bs. Triple-As have been wide compared to previous years, with 195bps about the average coupon for a five-year reinvestment, two-year non-call CLO in Q1 and Q2 2023, according to 9fin data.
This year managers have priced double-Bs wide of 800bps, and in some cases above 900bps, which brought the total return of the tranche to around 12-14%, once one has accounted for Sofr. This matches the modelled equity return in a new issue CLO from previous years, investors tell 9fin, so CLO equity investors preferred instead to invest in the double-B tranche for its par subordination and lower risk profile.