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CLO Interest Summary - March 2018

Core Content

This document provides an overview of the CLO (Collateralized Loan Obligation) market landscape in the US, Europe, and globally as of December 31, 2017. It includes insights from Moody's CLO/Structured Credit Group, feature articles on CLO manager rankings and credit implications of issuer consent payments, and highlights from the Global Structured Finance Conference 2018. Additionally, it discusses the performance and risk dynamics of CLOs, as well as regulatory developments in the Australian RMBS (Residential Mortgage-Backed Securities) market.

Key Information

• Moody's CLO/Structured Credit Group is the leading authority for credit ratings and research on CLOs and the structured credit market.

• The CLO market has seen shifts in manager rankings due to increased reset and refi volume, but the top 10 managers in the US and Europe retained their dominance in terms of AUM.

• US CLO Market:

  • The top 10 US CLO managers by AUM included GSO/Blackstone ($14.0 billion) and Carlyle ($13.9 billion).
  • By deal count, Carlyle led with 25 deals, followed by GSO/Blackstone with 24.
  • CLO 1.0s now account for just 1% of all CLOs by AUM, with the market dominated by CLO 2.0s.
  • In H2 2017, 105 CLOs totaling $60 billion were rated from 71 managers, up from 64 deals in H1 2017.
  • The share of AUM by the top 10 US managers remained at 28%.

• European CLO Market:

  • GSO/Blackstone and Carlyle were the top managers by AUM, with the top 10 European managers accounting for 59% of AUM.
  • By deal count, Carlyle led with 18 deals, followed by GSO/Blackstone and Alcentra with 14 each.
  • PGIM moved up to third place in AUM after adding two deals and increasing AUM by approximately €1 billion.
  • ICG entered the top 10 by AUM after adding €0.9 billion of CLOs, bringing its total AUM to €2.3 billion.
  • European CLOs are now mostly CLO 2.0s, accounting for 94% of the rated CLOs, up from 85% in H1 2017.

• Global CLO Market:

  • The top 10 managers by AUM remained unchanged, with GSO/Blackstone leading at $21.5 billion.
  • By deal count, Carlyle led with 43 deals, followed by GSO/Blackstone with 38.
  • There were new additions and departures in the global rankings, but the overall structure remained stable.

• CLO Manager Landscape Highlights (2017):

  • The US CLO market saw varied activity, with a mix of refinancings, resets, and new deals.
  • 55.5% of US CLO 2.0 managers brought deals to the market in H2 2017, up from 42% in H1 2017.
  • Five new US managers were rated in H2 2017, contributing to the overall growth of the market.
  • The total US CLO AUM increased to $438 billion, up 7% from the end of H1 2017.

• CLOs – Europe: Widespread use of issuer consent payments would be credit negative

  • Issuer consent payments bypass noteholders and flow only to equity, which is a credit negative for CLOs.
  • The case of Verisure illustrates this: the company paid consent fees to bondholders to approve a dividend, which increased its leverage and led to a corporate family rating downgrade from B1 to B2.
  • Despite this, the credit quality of CLOs with Verisure exposure did not materially deteriorate due to the small size of the downgrade and limited exposure.
  • The median WARF (Weighted Average Rating Factor) for European CLO 2.0s increased by 18 points to 2705 in December 2017, but the impact on CLOs was minimal.

• Moody's Leveraged Finance and CLO Summit: Race to the bottom - The final lap

  • The summit focused on market developments, yield chasing, and potential risks.
  • It emphasized the need to understand the potential price of disruptive challenges and the evolving risk dynamics.
  • The event attracted over 150 senior investors, issuers, and analysts.

• Global Structured Finance Conference 2018

  • The US and European CLO markets, and the Australian RMBS sector were key topics.
  • Discussions centered around structural weakening, risk retention rules, and the performance of CLOs and RMBS under different market conditions.
  • US CLOs: Structural flexibility has increased, but this may lead to heightened risks. CLOs are using more flexible collateral quality tests and allowing amendments with limited noteholder involvement.
  • European CLOs: Longer portfolios and reduced subordination are major concerns. Some CLOs have extended WAL (Weighted Average Life) tests to 8.5 or 9 years.
  • Australian RMBS: Regulatory changes by APRA have reduced riskier loan types (investment and interest-only mortgages) in bank portfolios, which is credit positive for bank-sponsored RMBS. Non-bank lenders have increased their share of these mortgages, leading to a more complex credit risk profile.

Main Points

• CLO Manager Rankings:

  • US and European markets showed minor shifts in rankings due to reset and refi activity.
  • GSO/Blackstone and Carlyle remained top managers in both regions.
  • CLO 2.0s dominate the market, with minimal impact from CLO 1.0s.

• Credit Implications of Issuer Consent Payments:

  • Consent payments bypass noteholders and flow to equity, creating a misalignment of interests.
  • Widespread use of such payments could be materially credit negative for CLOs unless they are shared with noteholders.

• Market Trends:

  • Increased structural flexibility in CLOs may lead to higher exposure to certain risks.
  • The US and European CLO markets are evolving, with a focus on yield and risk management.
  • In Australia, regulatory changes are reshaping the RMBS market, with non-bank lenders playing a larger role.

• Performance and Risk Dynamics:

  • CLOs are facing challenges from monetary policy tightening and political uncertainty.
  • The performance of investment and interest-only mortgages could deteriorate in a downturn, as seen in Western Australia between 2015 and 2016.

Key Takeaways

• The CLO market is dynamic, with manager rankings shifting slightly due to reset and refi activity.
• Issuer consent payments pose a credit risk for CLO noteholders unless structured to benefit them.
• Structural changes in CLOs, such as longer WALs and reduced subordination, are increasing flexibility but also credit risk.
• Regulatory developments in Australia are positively impacting bank RMBS, while non-bank RMBS face more complex credit risks.
• The performance of CLOs and RMBS is influenced by macroeconomic conditions, including interest rates and economic downturns.

Appendices and Methodology

• The data is based on Moody's rated transactions, excluding those not rated.
• CLO 2.0s are defined as those closed after the 2008 credit crisis.
• AUM is calculated using the total collateral and cash in the base currency, with European AUM converted to USD.
• The study includes both BSL (Broadly Syndicated Loans) and SME (Small and Medium Enterprise) CLOs.
• SME CLOs are defined by having more than 50% SME loans at closing, though some pools include large proportions of BSL.
• CLOs managed by MOAs (Majority-Owned Affiliates) or CMOAs (Capitalized Majority-Owned Affiliates) are attributed to the manager affiliate rather than the SPV.