Egan-Jones CLO* Summary Report (August 2024)
Rolling – The number of CLOs issued in July rose from 20 last year to 95 this year while the value rose from $7.86B to $38.7B (https://finsight.com/collateralized-loans-clos-abs-bond-issuance-overview). As can be seen in the below right-hand chart, the asset yield was about 8.8% while the weighted average tranche coupon was approximately 7.3%. Hence using the Adjusted Asset Coupon (i.e., including estimated losses) near 8.3%, the resulting pre-expense spread is near 10% for equity (i.e., 8.3% less 7.3% times 10 to reflect the leverage). Given 10-year Treasuries of 3.77% (https://fred.stlouisfed.org/series/DGS10), the arbitrage has become more attractive on a relative basis. A chart to watch is I-D indicating a slight rise in the lower rated CLO assets.
Currently, Egan-Jones tends to have a more positive view of CLO credit quality as compared to other credit rating agencies, as demonstrated in the table below.
I. Deal Key Metrics Summary
As of July 2024, Egan-Jones rated 1482 CLO deals. We collected and calculated available deal level, tranche level and asset level key metrics such as deal weighted average rating factor and tranche subordinations, compared with prior period(s) analysis results and summarized highlights below.
I-A. Weighted Average Rating Score
Egan-Jones collected the weighted average rating score (WARS)³ of covered CLO deals. The 25th, 50th, and 75th percentiles of the WARS value were 3685, 3794, and 3921, respectively.
I-B. Diversity Score
Egan-Jones collected the Diversity Score (DS)⁴ of covered CLO deals. The 25th, 50th, and 75th percentiles of the DS value were 57, 63, and 70, respectively. Egan-Jones calculated and compared the monthly average value of DS data from May 2022 to this month. The mean value of DS has decreased over the observed period, which indicates the diversity level of the portfolios might be decreasing.
I-C. Super Senior Tranches Subordination
Egan-Jones collected the senior tranches subordination⁵ (%) (STS) of covered CLO deals. The 25th, 50th, and 75th percentiles of the STS value were 34.2, 36.1, and 38.8, respectively.
I-D. CCC+ or Lower Rating Percentage
Egan-Jones collected the CCC+ and Lower Rated Asset Percentage (%) (CLRA) of covered CLO deals. The 25th, 50th, and 75th percentiles of the CLRA value were 6.6, 8.3, and 10.9, respectively. Egan-Jones calculated and compared the monthly average value of CLRA data from May 2022 to this month. The mean value of CLRA has increased over the observed period, which indicates the percentage of lower rated assets might be increasing.
I-E. CLO Leverage Summary
Note: Deal balance is the sum of current balance of all deal tranches; Debt balance is the sum of current balance of all debt tranches.
Egan-Jones reviewed various liability / asset metrics. The 25th, 50th, and 75th percentiles of the total deal balance to collateral balance (total current tranches balance / current collateral balance) were 93.0%, 97.0%, and 100.0%, respectively. The 25th, 50th, and 75th percentiles of the debt balance to collateral balance (current non-equity tranches balance / current collateral balance) were 106.0%, 108.0%, and 110.0%, respectively.
II. Tranche Key Metrics Summary
II-A. Tranche Subordination Analysis
The average subordination levels (defaulted assets are valued at market value) of senior tranches and mezzanine tranches were 38.6% and 15.5%, respectively. The 25th, 50th, and 75th percentiles of senior tranche subordination levels (defaulted assets are valued at market value) were 34.3%, 36.1%, and 38.7%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche subordination levels (defaulted assets are valued at market value) were 8.0%, 14.7%, and 21.7%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available subordination of each rating category (includes +/-) can be found in the table above.
II-B. Tranche Coupon Analysis
The average coupon of senior tranches and mezzanine tranches are 6.5% and 8.8%, respectively. The 25th, 50th, and 75th percentiles of senior tranche coupon are 6.6%, 6.7%, and 6.8%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche coupon are 7.3%, 8.2%, and 10.7%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available coupon of each rating category (includes +/-) can be found in the table above.
II-C. Tranche Spread Analysis
The average spread (over 3 months SOFR) of senior tranches and mezzanine tranches are 1.5% and 3.9%, respectively. The 25th, 50th, and 75th percentiles of senior tranche spread (over 3 months SOFR) are 1.3%, 1.4%, and 1.6%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche spread (over 3 months SOFR) are 2.1%, 3.1%, and 5.8%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available spread (over 3 months SOFR) of each rating category (includes +/-) can be found in the table above.
II-D. Egan-Jones Ratings vs Other Agencies
Below is a summary of Egan-Jones ratings compared with other agencies. For the detailed full listing and sorting of Egan-Jones’s CLO ratings, please visit our website at https://portal.egan-jones.com/client/fast/clo.aspx.
Egan-Jones's Key Rating Features & Differences Compared With Others
Below is a summary of Egan-Jones's approach (see our Methodology for a more complete description):
1. Our rating is derived from estimated losses.
2. The probabilities of default utilized are generally more conservative than industry standards.
3. Generally, our ratings are more heavily model driven and take into account fewer subjective assumptions.
4. Generally, we update the cashflow and ratings monthly based on the availability of the trustee reports.
5. Our analysis is conducted using information and cash flow engines supplied by a recognized industry provider.
6. For some transactions, when senior tranches are being paid down/off, our ratings on subordinated tranches generally move higher than the initial rating due to the improved tranche subordination and resulting in less estimated loss. To avoid confusion, we exclude from the chart above the impacted transactions. (AGCCM 2021-1A, ANCHF 2022-16A, APID 2017-26A, AWPT 2018-9A, BABSN 2017-1A, BABSN 2018-2A, BALLY 2018-1A, BSP 2017-12A, CATSK 2017-1A, CBAM 2017-1A, CBAM 2018-8A, CGMS 2013-1A, CIFC 2014-2RA, CLRCK 2015-1A, CTWTR 2015-1A, DCRK 2017-1A, DRSLF 2017-47A, FSSLF 2015-2A, GLD11 2015-11A, GLM 2017-2A, GOCAP 2015-23A, HAYFN 2018-8A, HLA 2015-3A, HLA 2017-1A, HLA 2017-2A, ICG 2018-3A, JMP 2017-1A, KKR 13, LCM 38A, MP10 2017-1A, OZLM 2017-17A, SHACK 2017-10A, TFLAT 2017-1A, TICP 2017-9A, TICP 2018-10A, TREST 2018-2A, VENTR 2014-18A, VENTR 2017-27A, VIBR 2017-6A, VIBR 2017-7A, VOYA 2016-2A, WELF 2016-1A, WELF 2016-2A, WELF 2017-2A, WELF 2018-2A, ZAIS 2021-17A, ZCCP 2018-1A)
III. Pool Asset Key Metrics Summary
This section summarizes the characteristics of the underlying loans in the CLO deals.
III-A. Asset Distribution
III-B. Asset Coupon Analysis
III-C. Asset Rating Analysis
III-D. Asset Default Analysis
Notes
Adj asset coupon means gross asset coupon minus the asset estimated losses which is assumed 50% of loss given default.
Weighted Average Rating Score is derived from 10-year default rate and used to calculate the weighted average default probability of the portfolio.
Diversity Score represents the number of independent, identical assets that we can use to mimic the default distribution of the actual portfolio.
Tranches Subordination is calculated as (Collateral Value - (Pari-Passu Balance + Senior Balance)) / Collateral Value. Defaulted assets are valued at market value.
For more details, please refer to Egan-Jones's CLO methodology.