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Despite increases in treasury yields since December, CLO issuances reached another max in March (80) since November 2021 (94)¹.

As can be seen on the below right chart entitled “Weighted Average Asset Coupon vs. Tranche Coupon”, the adjusted asset coupon (adjusted for estimated losses) rose only slightly from 8.25% in July, continuing the trend since the beginning of the year.

The adjusted asset coupon (adjusted for estimated losses) rose from 8.0% to 8.25% in July, which on its face is attractive. Meanwhile, the average tranche coupon increased from 6.9% to approximately 7.3%.

Still stressed – Many outcomes can be drawn from this month’s results. The WARS has been stable and funding costs have increased faster than asset coupons. Section II-B shows average tranche coupons over time; B tranche coupons have decreased while all others
have increased.

Still stressed – Many outcomes can be drawn from this month’s results. The WARS has been stable and funding costs have increased faster than asset coupons.

More net yield improvement. Asset coupons (the blue and green lines in the chart below right) have increased faster than Tranche coupons (the orange line) have increased.

CLOs have historically been among the best performing asset classes during times of stress, and to date, their winning ways have continued. Tranche coupons (the orange line in the chart below right) have increased, but so has the asset coupon (the blue and green lines).

Not Accounting For SFVegas 23 Prelim List.

*Egan-Jones CLO ratings are Non-NRSRO ratings and are not issued or maintained by EJR in its capacity as a NRSRO.

More comfort. The moderation of the Tranche Coupon (orange line) in the chart to the right below suggests that capital providers are moderating their needed yield relative to the Asset Coupons (the blue line). Additionally, BBBs are trading near SOFR + 600bps at a 2% discount, translating into a near 10% yield.

*Egan-Jones CLO ratings are Non-NRSRO ratings and are not issued or maintained by EJR in its capacity as a NRSRO.

Some comfort. During the 2008 Credit Crisis, CLOs were among the best-performing areas of structured finance, in contrast to the disasters in RMBS and CMBS. Current performance provides some comfort whereby BBB are trading near SOFR + 650bps at a 2% discount, translating into a 10% yield. Given the 7% subordination (see chart II-A below) and the 50% recovery rates, currently, 15% of the portfolio could default before losses attach.

*Egan-Jones CLO ratings are Non-NRSRO ratings and are not issued or maintained by EJR in its capacity as a NRSRO.

Weathering the storm – despite the turmoil in the economy, CLO credit quality to date has held steady as can be seen below. Egan-Jones provides an overview of the CLO market to facilitate comparisons over time and among various CLOs. Of note is the improvement of WARS in average to about 3750 from 3800 over the past six months indicating the overall default risk is relatively unchanged.

*Egan-Jones CLO ratings are Non-NRSRO ratings and are not issued or maintained by EJR in its capacity as a NRSRO.

"Weathering the storm – despite the turmoil in the economy, CLO credit quality to date has held steady as can be seen below. Egan-Jones provides an overview of the CLO market to facilitate comparisons over time and among various CLOs..."

*Egan-Jones CLO ratings are Non-NRSRO ratings and are not issued or maintained by EJR in its capacity as a NRSRO.