Egan-Jones CLO* Summary Report (August 9, 2023)
Egan-Jones CLO* Summary Report (August 9, 2023)
*Egan-Jones' ratings in this report are not issued under an NRSRO license
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 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%. However, the problems manifest further down the capital stack. Assuming the spread between the adjusted asset coupon and the tranche coupon is 0.95% (i.e., 8.25% less 7.3%) and leverage is about 10:1, equity holders are left with a pre-expense return near 10% range, which is too skimpy for new transactions. Hence, there are fewer new transactions. Per Finsight, the number of broadly syndicated CLOs declined for July declined from 58 last year to 17 this year 1]. Tyler Wallace, a portfolio manager at Fair Oaks Capital, which buys leveraged loans to bundle into CLOs, stated, “the current arbitrage is about half of the historical range.” To revert to prior volume levels, one of four things is needed: (i) increase adjusted asset coupon, (ii) reduce tranche coupon rates, (iii) reduce overall interest rates (i.e., SOFR and Treasuries), or (iv) a combination of the three. Stay tuned. Three deals were added since last report.
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 2023, Egan-Jones rated 1404 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)  of covered CLO deals. The 25th, 50th, and 75th percentiles of the WARS value were 3725, 3814, and 3917, respectively.
I-B. Diversity Score
Egan-Jones collected the Diversity Score (DS)  of covered CLO deals. The 25th, 50th, and 75th percentiles of the DS value were 58, 63, and 69, respectively. Egan-Jones calculated and compared the monthly average value of DS data from January 2023 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 subordination  (%) (STS) of covered CLO deals. The 25th, 50th, and 75th percentiles of the STS value were 32.4, 34.2, and 36.2, respectively. Egan-Jones calculated and compared the monthly average value of STS data from January 2023 to this month. The mean value of STS has increased over the observed period, which indicates the average senior tranche subordination might be increasing.
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 5.6, 7.0, and 8.1, respectively. Egan-Jones calculated and compared the monthly average value of CLRA data from January 2023 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 96.0%, 98.0%, and 99.0%, 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 109.0%, respectively.
II. Tranche Key Metrics Summary
II-A. Tranche Subordination Analysis
The average subordination levels (defaulted assets at market value) of senior tranches and mezzanine tranches tranches were 35.3% and 13.2%, respectively. The 25th, 50th, and 75th percentiles of senior tranche subordination levels (defaulted assets at market value) were 32.5%, 34.3%, and 36.3%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche subordination levels (defaulted assets at market value) were 5.7%, 12.7%, and 19.6%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available subordination of each rating category (includes +/-) can be found in table above.
II-B. Tranche Coupon Analysis
The average coupon of senior tranches and mezzanine tranches are 6.5% and 8.7%, 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%, 8.1%, and 10.6%, 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 LIBOR) of senior tranches and mezzanine tranches are 1.1% and 3.6%, respectively. The 25th, 50th, and 75th percentiles of senior tranche spread (over 3 months LIBOR) are 1.0%, 1.1%, and 1.2%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche spread (over 3 months LIBOR) are 1.9%, 2.8%, and 5.8%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available spread (over 3 months LIBOR) 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):
- Our rating is derived from estimated losses.
- The probabilities of default utilized are generally more conservative than industry standards.
- Generally, our ratings are more heavily model driven and take into account fewer subjective assumptions.
- Generally, we updates the cashflow and ratings monthly based on the availability of the trustee reports.
- Our analysis is conducted using information and cash flow engines supplied by a recognized industry provider.
III. Pool Asset Key Metrics Summary
This section summarize 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
- https://finsight.com/collateralized-loans-clos-abs-bond-issuance-overview?products=ABS®ions=USOAUS 2023 LL, HY Default Forecast Lifted by Growing Macro Headwinds
- 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 stands for the percentage of capital subordinated to the current tranche
For more details, please refer to Egan-Jones's CLO methodology.
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