the us institutional corporate loan market and an …...the us institutional corporate loan market...
TRANSCRIPT
The US Institutional
Corporate Loan Market and
an Overview of CLOs
Moderator:
Elliot Ganz, LSTA
Panelists:
Jeff Bakalar, Voya
Matthew Miller, Crescent Capital
Tel Aviv, June 13, 2017
Topics for Today
• Introduction to the US Institutional Corporate Loan Market
• What are US institutional corporate loans?
• Why are they attractive investments?
• How can you invest in the loan market?
• Introduction to CLOs
• Structure
• Performance
• Investing in CLO equity
2
What are Institutional Corporate Loans?
Extensions of credit to non-investment grade corporate borrowers originated by major banks A global market in excess of $1 trillion
Issued by mid- to large-sized companies to finance acquisitions and other growth initiatives
Senior in the capital structure; secured by a first priority lien on a borrower’s assets Repaid before other creditors/equity upon a credit event
Collateral typically provides substantially higher recoveries
Floating rate with coupon return comprised of a nominal credit spread over LIBOR Rates reset every 45 - 60 days on average (duration of approximately 0.2 years)
Structurally less liquid (i.e., longer settlement times) but actively traded in an established secondary market Average trade volumes in excess of $500 billion annually over the past 5 years
■ Large, syndicated
loans to non-
investment grade
companies
■ Secured by the
borrower’s assets
■ Rank highest in a
borrower’s capital
structure
■ Floating rates of
interest
3
Senior in the Capital Structure with a Lien on
Assets
Senior Unsecured Notes
High Yield Bonds
Preferred/Common Equity
20%-40%
20%-40%
Downstream guarantees from a holding co.
Upstream guarantees from subsidiaries
Receivables
Inventory
Plant & Equipment
Borrower Liabilities% of Borrower
Liabilities
Seniority and Collateral for Senior Loans
Borrower Assets
Cash (in certain cases)
Senior Secured Loans 40%-60%
Property (including real estate)
Intangible Assets (patents, trademarks)
Pledged to:
PaidFirst
Paid Last
4
The Four Building Blocks of the Loan Investment
Thesis – All Providing Value in Today’s Market
Ultra–short duration; directly correlated with changing short-term
rates
No active rebalancing necessary
Structural Protection: Senior secured position and pledge on
borrower assets has resulted in significantly lower historical loss
rates than those for subordinated and unsecured debt obligations
Capital Preservation: Loan demand/prices positively influenced by
rising rates (i.e., the opposite of bonds)
Competitive yields on both an absolute basis and relative basis,
particularly when adjusting for duration and potential credit loss
Attractive yields
Lower volatility
Floating rate
coupon
Key structural downside protection
Structural advantages (i.e., floating rate, senior and collateral
backing)
Differentiated and diverse global investor base works to dampen
volatility
Lower volatility and high income create attractive Sharpe Ratios
5
There are Many Ways to Invest in The U.S.
Institutional Corporate Loan Market
Separately Managed Accounts
▪ Customized
▪ Large Investment
▪ Tailored Liquidity
Provisions
Comingled Funds
▪ Medium Investment Size
▪ Periodic Liquidity
Provisions
▪ Ease of Administration
CLOs
▪ Structured Vehicle
▪ Different Risk Tranches (Rated
Floating Rate Notes vs.
Equity)
▪ Inherently Less Liquid
Mutual Funds
▪ Retail Funds/ETF
▪ Ease of Investment
▪ Small Investment Size
▪ Daily Liquidity
6
Introduction to CLOs
Assets
Illustrative Underlying Credit Assets Illustrative CLO Balance Sheet
Lo
sse
s
Ca
shflo
ws
Subordinated Notes
Not Rated
[9 - 11] %
Class E Notes
[BB]
[4 - 6] %
Class D Notes
[BBB]
[4 - 6] %
Class C Notes
[A]
[5 - 9] %
Class B Notes
[AA]
[9 - 13] %
Class A Notes
[Aaa/AAA]
[60 - 62] %
How a CLO Works: Transparent Portfolio of Loan
Assets That Support CLO Debt and Equity
CLOs invest in pieces of loans to mostly well-known U.S. and international companies and the portfolios are
actively managed by experienced asset managers
The interest and principal of the loans pay the interest (and principal) of the CLO notes, starting at the AAA
notes and working the way down the waterfall
If there are losses on loans from defaults, those losses impact the equity holdings first 8
CLOs Have Suffered Practically No Losses
Impairments include principal losses (0.81%), distressed exchanges (0.14%), EOD/Expected
losses (0.08%) and other possible losses (0.1%)
Highest rated tranche to suffer a loss was rated A2
Not one Aa or Aaa rated tranche has ever suffered an impairment
Unimpaired98.9%
Impaired1.1%
Source: Moody’s Investors Service
Performance of 5176 CLO tranches, 1996-Aug 2014
9
CLO Yield and Relative Value
Where is the Value in the CLO Capital
Structure?
• CLO note yields increase materially as one moves down the rating scale
• At every rating level, CLO notes tend to yield more than the equivalently rated
investments in other asset classes
Source: BAML
0
100
200
300
400
500
600
700
800
900
1,000
AAA AA A BBB BB B
Sp
read
(b
ps)
New Issue U.S. CLO Tranche Spreads
11
Bottom of Capital Structure:
Cash-on-Cash Equity Returns
Source: BAML
0%
5%
10%
15%
20%
25%
30%
7/1
/06
11
/1/0
6
3/1
/07
7/1
/07
11
/1/0
7
3/1
/08
7/1
/08
11
/1/0
8
3/1
/09
7/1
/09
11
/1/0
9
3/1
/10
7/1
/10
11
/1/1
0
3/1
/11
7/1
/11
11
/1/1
1
3/1
/12
7/1
/12
11
/1/1
2
3/1
/13
7/1
/13
11
/1/1
3
3/1
/14
7/1
/14
11
/1/1
4
3/1
/15
7/1
/15
11
/1/1
5
3/1
/16
7/1
/16
11
/1/1
6
3/1
/17
Retu
rn (
%)
CLO Equity Returns by Vintage (and LTM 1.0 Avg.)
US LTM WAvg (CLO 1.0) 2011
2012 2013
2014 2015
• U.S. CLO cash on cash equity returns averaging more than 15%
12
Post-Crisis CLO Equity 2.0 IRR Beat Comparables
Source: Citi Research
Cross Asset Weighted Average IRRs
Source: Citi Research, Cambridge Associates, as of 12/31/2016; PE returns are as of 06/30/2016
*Our priced 2.0 sample includes 125 CLO equity tranches from 2012 to 2015 vintages, about 20% of the overall universe. It is still representative of the overall universe and showing
roughly the same distribution of CLO equity NAV, structure/leverage, and vintage. Paid-down deals will be excluded from the analysis so CLO 1.0 IRRs are biased to outperforming
deals. *Our method takes CLO equity’s monthly secondary mark and historical cashflows to calculate the running since-inception IRR for each deal, and then calculate the weighted
average return of all sampled CLO 2.0 equity.
*Private equity sample is based on 1,283 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed
between 1986 and 2014. CA research shows that most funds take at least six years to settle into their final quartile ranking, and previous to this settling they typically rank in 2-3 other
quartiles; therefore fund or benchmark performance metrics from more recent vintage years may be less meaningful. However, when a private equity fund stops reporting its data, it will
be removed from the sample base. Thus, “survivorship bias” exists in both the US PE performance database and our US CLO equity sample, which could skew the returns upwards.
4.6%
7.1% 7.1% 6.9%
10.7%
22.5%
10.8%
3.6% 4.3%
6.7%
8.9%
11.8%12.2%
18.3%
0%
5%
10%
15%
20%
25%
S&
P L
ev L
oan
Inde
x
Citi
US
HY
Bon
d In
dex
Rus
sell
S&
P 5
00
US
Priv
ate
Equ
ity
2005
-07
US
CLO
Equ
ity
2005
-07
EU
R C
LO E
quity
S&
P L
ev L
oan
Inde
x
Citi
US
HY
Bon
d In
dex
Rus
sell
S&
P 5
00
US
Priv
ate
Equ
ity
2012
-15
US
CLO
Equ
ity
2013
-15
EU
R C
LO E
quity
Average 10-year return vs CLO
1.0 Equity
Average 3-year return vs CLO
2.0 Equity
13
But Both US CLO 1.0 and 2.0 Equities Beat
Peers in Public and Private Equity
Source: Citi Research, Intex, Cambridge Associates, as of 12/31/2016
*PE returns are as of 06/30/2016.
0%
5%
10%
15%
20%
25%
2005 2006 2007 2012 2013 2014 2015
US Private Equity US CLO Equity Russell 2000
14
CLO Equity Still Provides Optionality Today
Source: Citi Research
Source: Citi Research, Intex, as of 4/30/2017 Source: Citi Research, LCD, as of 5/23/2017
Tighter AAA supports CLO Refi/Reset An inevitable choice to enhance CLO
Equity returns
100
110
120
130
140
150
160
170
180
190
200
0
2
4
6
8
10
12
14
16
18
20
Feb
-13
Jul-1
3
Dec
-13
May
-14
Oct
-14
Mar
-15
Aug
-15
Jan-
16
Jun-
16
Nov
-16
Apr
-17
bp
$bn
Reset & Refi Volume
CLO 2.0 AAA DM (RHS)
1121
60 57
90
72
352
22
12
596
11
10
8
3
0
20
40
60
80
100
120
140
2011 2012 2013 2014 2015 2016 2017 YTD
$bn
Remaining Volume Refi Volume Reset Volume
15
Addressing Regulatory “Risk Retention”
Requirements Can Enhance CLO Equity Yields
“Risk retention” rules and an ever shifting CLO equity buyer
base have forced capital constrained managers to look for capital
partners to assist in their ongoing CLO issuance programs
In exchange for this capital, investors trade some liquidity for
additional yield in the form of sharing of management fees and
warehouse facility income
This could add up to 400bps to the yield on a portfolio of CLO
Equity
16
Appendix
There Are 300 Active Institutional Loan Investor
Groups & Portfolios
0
50
100
150
200
250
300
350
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Active Institutional Lender Groups/Portfolios
Avg. Institutional Lender Count Per Deal
Source: S&P Capital IQ LCD
Finance &Insurance
Co.
Hedge,Distressed
& HYFunds
LoanMutualFunds
CLO
0%
10%
20%
30%
40%
50%
60%
70%
Institutional Lender Market Share
18
Institutional Corporate Loans Are an Important
Component of the U.S. Debt Markets
US Debt Market Universe US Corporate Debt
Inst. Corp Loans$960B HY Bonds
$1,550B
HG Bonds$6,608B
Treasury$13,192B,
Mortgage Related$8,728B
Muni’s$3,715B
Fed Agencies$1,995B
Money Market$2,807B
Asset Backed$1,327B
Inst. Corp. Loans
$960 Bil
HY Bonds $1,550Bil
HG Bonds$6,608 Bil
Total Size of the US Debt Market $40.9T
as of 12/31/15
Total Size of US Corporate Debt $9.1T
as of 12/31/16
Source: Credit Suisse19
The U.S. Institutional Corporate Loan Market
Provides Substantial Trading Liquidity
Source: The LSTA Trade Data Study
0%
25%
50%
75%
100%
$-
$250
$500
$750
$1,000
2010 2011 2012 2013 2014 2015 2016
Bil
lio
ns
Trade Volume Avg. Size of the S&P/LSTA Leveraged Loan Index Turnover Ratio (%)
20
Structural Characteristics Provide Unique
Benefits
Fundamental Characteristics Key Benefits
Large mature market; active secondary
market
Risk/reward/correlation advantages
Superior structural features compared to
other credit assets
Attractive yields on an absolute and
relative basis
Favorable credit performance through many
cycles
High recovery rates; lower losses upon
default
Floating rate coupon, typically between 300-
400 basis points, provides potential income
upside in today’s low rate environment
Embedded potential inflation/rising rate
hedge
LIBOR Floors provide downside income
protection
Downside protection by way of short
duration profile
Source: Apollo/LSTA 21
U.S. Institutional Corporate Loans Have Relatively
Low Losses as Compared to High Yield Bonds
0%
1%
2%
3%
4%
5%
Default rate Expected loss
Institutional term loans
Sr. Unsec'd HY bonds
0%
10%
20%
30%
40%
50%
60%
70%
Loss given default
Institutional term loans
Sr. Unsec'd HY bonds
➢ Loans are senior and secured, contributing to a lower loss rate
➢ Loss given default is low for loans - 19% because recovery rates are so high – 80%
➢ Loan repayment rates are high, averaging 2.7% per month since 2001
➢ Loans are floating rate (based over LIBOR), so interest rate risk is minimal
22Source: S&P Capital IQ/LCD, Moody’s Investors Service, Bloomberg
2%
3%
4%
5%
6%
7%
8%
9%
10%
2010 2011 2012 2013 2014 2015 2016 2017
Senior Loans (Discount Yield to 3 Year Call)
US HY (YTW): +32 bps
US IG (YTW): -222 bps
Historically competitive yield
with virtually no duration risk
U.S. Institutional Corporate Loans Exhibit
Strong Relative Values
US IG
US HY
MBS
Municipal Bonds5-7 Year Treasuries
Senior Loans
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7 8E
ffective Y
ield
(%
)Effective Duration (years)
Yield and Duration Comparisons
S&P/LSTA Leveraged Loan Index and Various Asset Classes
Data as of January 31, 2017
*Discount Yield to 3 Year Call uses Secondary Spread for the S&P/LSTA Leveraged Loan Index Index plus 3 Month LIBOR at month-end. Three year maturity
assumption: (i) all loans pay off at par in 3 years, (ii) discount from par is amortized evenly over the 3 years as additional spread, and (iii) no other principal payments
during the 3 years. Secondary spread is calculated based upon the current bid price, not on par. The Index is not subject to any fees or expenses. Investors cannot invest
directly in an index. Past performance does not guarantee future results and there is the possibility of loss. The S&P/LSTA Leveraged Loan Index is an unmanaged total
return index that captures accrued interest, repayments, and market value changes.
23Source: S&P/LCD, BAML and Bloomberg
The Indices are not subject to any fees or expenses. An investor cannot invest directly in an index. Past performance does not guarantee future results and there is the possibility of loss.
Institutional Corporate Loans Have Exhibited
Lower Volatility and Attractive Sharpe Ratios
Loans have continued to experience less volatility as
compared to most traditional income asset classes,
particularly high yield bonds
Provides a unique asset allocation tool and has resulted in
attractive Sharpe Ratios
Sharpe Ratio
Data as of January 31, 2017
Annualized Standard Deviation
Data as of January 31, 2017
3.88
1.19
1.87
4.17
0.80 1.29
0.00
1.00
2.00
3.00
4.00
5.00
1 Year 3 Years 5 Years
S&P/LSTA Leveraged Loan Index
Barclays US Corporate High Yield - 2% Issuer Capped
2.88 2.89 2.50
4.916.02
5.38
0.00
2.00
4.00
6.00
8.00
1 Year 3 Years 5 Years
S&P/LSTA Leveraged Loan Index
Barclays US Corporate High Yield - 2% Issuer Capped
Average 12-month Lagging Standard Deviation of Returns
January 2010 to January 2017
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2010 2011 2012 2013 2014 2015 2016 2017
S&P/LSTA Leveraged Loan Index
BA/ML High Yield Master II Index
10-Year US Treasuries
24Source: charts clockwise left to right: S&P/LCD, not annualized; S&P/LSTA Leveraged Loan Index; Barclays U.S. Corporate High Yield – 2% Issuer Capped
Correlations Between Loans and Various
Assets
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service, Ibbotson Associates
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
Credit Suisse Leveraged Loan Index Return Corrolation (1992-2016)
25
0
1,000
2,000
3,000
4,000
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
Jan
-16
Company Coverage
Number of Loans Priced
0
2,000
4,000
6,000
8,000
Jan
-00
Jan
-02
Jan
-04
Jan
-06
Jan
-08
Jan
-10
Jan
-12
Jan
-14
Jan
-16
Number of Quotes Provided Daily by35 Broker/Dealers
In 1999 The U.S. LSTA/TRLPC Secondary Mark-to-Market (MTM) Pricing Service Launched
Source: LSTA/Thomson Reuters LPC MTM Pricing26
In 2001 The Wall Street Journal Began Coverage
on The Senior Secured Corporate Loan Market
❖ Transparency and acceptance of MTM prices were critical in establishing today’s secondary market liquidity levels.
Source: Wall Street Journal27
Institutional Corporate Loans Have Returned 5.8%
on Average Over 20 Years (only two down years)
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
S&P/LSTA Leveraged Loan Index ML US High Yield Index
ML US Corp Index
28Source: S&P/LSTA Leveraged Loan Index
The Institutional Corporate Loan Market is
Less Volatile Than Other Debt Markets
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Dec
-97
Dec
-98
Dec
-99
Dec
-00
Dec
-01
Dec
-02
Dec
-03
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
Dec
-16
12-M
o.
Lag
gin
g S
D o
f R
etu
rn
S&P/LSTA Leveraged Loan Index Index ML US High Yield Index
ML US Corp Index ML 10yr US Treasury
29Source: S&P/LSTA Leveraged Loan Index
While Secondary Loan Market Prices Have Fluctuated Over
the Past 5 Years, Annual Interest Income has Averaged 5%
-2%
0%
2%
4%
6%
8%
10%
12%
2012 2013 2014 2015 2016
Total Return Interest Return
90
92
94
96
98
100
102
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
AVG Trade Price
Median Trade Price
Source: LSTA Trade Data Study & S&P/LSTA LLI30
The Secondary Loan Market Allows Managers to Create
Industry Diversification Through Sector Allocation
Source: S&P/LSTA Leveraged Loan Index31
L+
L+100
L+200
L+300
L+400
L+500
L+600
L+700
L+800
L+900Discounted Margin (to maturity)
CLO Investors
Geographic Distribution
• U.S.
• Japan
• Non-Japan Asia
• Europe
Investor Types
• Banks
• Asset Managers
• Insurance Companies
• Pension Funds
• Mutual Funds
• Hedge Funds
• High Net Worth
• Other
CLO investors come from many regions of the world
Investors include banks, asset managers, insurance companies, pension funds, mutual funds,
hedge funds, high net worth investors and and more
32
Lifecycle of a CLO
•The manager and the arranger determine the key features of the deal, and start negotiations with initial investors. The manager starts to identify and purchase assets, often with the use of a warehouse facility. This process starts up to severalmonths before pricing.
Pre-pricing
•Commitments are finalized and discount margins (or fixed coupons) for the liabilities are determined. Closing typically occurs two to four weeks later, at which point interest starts to accrue.Pricing
•Usually, the manager does not have the full portfolio purchased by the time of pricing, and has a ramp-up period (six months is common) to purchase the remaining assets. Once the target portfolio size has been reached, the CLO passes the effective date, at which point various coverage and portfolio quality tests start to apply.
Ramp-up
•CLO equity investors can exercise the rights to call a deal after a non-call period (typically 2 years for 2.0 deals). When calling the deal, equity investors repay the debt tranches at par, through refinancing proceeds or from the sale of the loan portfolio.
Non-call period
•Equity investors may be incentivized to refinance the debt tranches of the deal after the end of the non-call period to lower the cost of funding. In certain cases, they may make additional changes to the deal document such as extending the length of the reinvestment period.
Refi/Reset
•The CLO manager actively manages the loan portfolio during the reinvestment period (typically 4+ years for 2.0 deals), using loan principal repayments and asset sale proceeds to purchase new assets. CLO investors generally do not receive principal payments during this period as this cash is mostly reinvested in new assets.
Reinvestment period
•Once the reinvestment period ends, most loan principal receipts are allocated to CLO liabilities, usually in strict sequential order. Often loan prepayments or the proceeds of sales of assets that the manager deems credit impaired or credit improved may still be reinvested. Equity investors often choose to call the deal at some point.
Amortization (and call)
33
Comparing CLO Default/Loss Experiences to Other
Asset Classes
• CLOs performed well through
the financial crisis and beyond
• There have been no defaults
on CLO notes rated AA or
better
• CLO note default rates are far
below those of other asset
classes
• CLO note default rates are far
below those of equivalently
rated bonds
0%
5%
10%
15%
20%
25%
30%
35%
Lo
ss R
ate
s (%
)
Loss Rate for IG CLO Notes Well Below Other ABS
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
AAA AA A BBB BB
Cu
mu
lati
ve D
efa
ult
Rate
(%
)
Default Rate of CLO Notes Well Below Equivalently Rated Corporate Bonds
CLO Notes
Corp Bonds
Source: BAML, S&P, Wells Fargo34
Testing the Resilience of CLO Notes to Loan
Defaults
• The two major default cycles in the recent loan market are 2000-2003 and 2009-2010
• 2000-2003 cycle was less severe, but lasted longer
• The 2009-2010 cycle was more severe, but shorter
• We can test what multiple of the default rates seen in the earlier periods would be necessary to cause
losses on CLO notes today
Source: S&P/LSTA Leveraged Loan Index
0%
2%
4%
6%
8%
10%
12%
Dec
-98
Jun
-99
Dec
-99
Jun
-00
Dec
-00
Jun
-01
Dec
-01
Jun
-02
Dec
-02
Jun
-03
Dec
-03
Jun
-04
Dec
-04
Jun
-05
Dec
-05
Jun
-06
Dec
-06
Jun
-07
Dec
-07
Jun
-08
Dec
-08
Jun
-09
Dec
-09
Jun
-10
Dec
-10
Jun
-11
Dec
-11
Jun
-12
Dec
-12
Jun
-13
Dec
-13
Jun
-14
Dec
-14
Jun
-15
Dec
-15
Jun
-16
Dec
-16
Defa
ult
rate
(%
)
Historical Leveraged Loan Default Rate
35
Testing the Resilience of CLO Notes to Loan Defaults
• Model assumes a 40% loss given default on
loans. (In contrast, the average historical
loss given default/loss severity is 20-30%.)
• Then we determine what multiple of the
2001-2003 and 2008-2009 default
experience would be necessary to create
losses on the average CLO note (at each
rating level)
• The top chart shows the multiples of 2001-
2003 defaults necessary to create losses for
different tranches. For instance, the default
rate would need to be 4x the 2001-2003
default rate in order to create losses on a
typical A rated CLO note (red bar).
• The bottom chart shows the multiples of
2009-2010 defaults necessary to create
losses for different tranches. For instance,
the default rate would need to be 3x the
2009-2010 default rate in order to create
losses on a typical BBB rated CLO note
(gold bar).
Source: BAML
0
1
2
3
4
5
6
7
8
AAA AA A BBB BB B
Mu
ltip
le o
f ’0
1-02 D
efa
ult
Rate
Multiple of 2001-03 Default Rate Necessary to Create a Loss
0
1
2
3
4
5
6
7
8
AAA AA A BBB BB B
Mu
ltip
le o
f ‘0
9-1
0 D
efa
ult
Rate
Multiple of 2009-10 Default Rate Necessary to Create a Loss
N/A
N/A
36
Relative Value: Top of the Capital Structure
Source: BAML
-
20
40
60
80
100
120
140
160
180
Jan
-16
Feb
-16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Aug-
16
Sep
-16
Oct
-16
No
v-1
6
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
Sp
read
(b
ps)
U.S. vs. Euro New Issue CLO AAA Spreads
U.S. CLO AAA
Euro CLO AAA
0
20
40
60
80
100
120
140
160
180
200
Jan
-12
May
-12
Sep
-12
Jan
-13
May
-13
Sep
-13
Jan
-14
May
-14
Sep
-14
Jan
-15
May
-15
Sep
-15
Jan
-16
May
-16
Sep
-16
Jan
-17
Sp
read
(b
ps)
U.S. CLO AAA vs. CMBS 10-Yr AAA Spreads
CLO AAA Secondary
CMBS 10Y AAA Secondary
• U.S. CLO AAA spreads remain wide relative to CMBS and to European CLO spreads
37
Relative Value: Spreads on CLO BB and B Rated
Notes vs. BB and B Rated Loans
Source: BAML, S&P/LCD
0
200
400
600
800
1000
1200
Jan
-13
Ap
r-13
Jul-
13
Oct
-13
Jan
-14
Ap
r-14
Jul-
14
Oct
-14
Jan
-15
Ap
r-15
Jul-
15
Oct
-15
Jan
-16
Ap
r-16
Jul-
16
Oct
-16
Jan
-17
Ap
r-17
Sp
read
(b
ps)
Spreads of BB Rated Loans vs. BB Rated CLO Notes
Loan BB all-in spread
CLO BB
0
200
400
600
800
1000
1200
Jan
-13
Ap
r-13
Jul-
13
Oct
-13
Jan
-14
Ap
r-14
Jul-
14
Oct
-14
Jan
-15
Ap
r-15
Jul-
15
Oct
-15
Jan
-16
Ap
r-16
Jul-
16
Oct
-16
Jan
-17
Ap
r-17
Sp
read
(b
ps)
Spreads of B Rated Loans vs. B Rated CLO Notes
Loan B all in spread
CLO B
• U.S. CLO BB and B spreads are wider than spreads on BB and B rated term loans
• Recall that default rates on CLO notes are lower than on equivalently rated bonds
38
2017 U.S. and European CLO Issuance,
Refinancings and Resets
Source: TR-LPC
-
5
10
15
20
25
Jan
-16
Feb
-16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Aug-1
6
Sep
-16
Oct
-16
No
v-1
6
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
U.S. CLO Issuance, Refis and Resets
CLO Resets
CLO Refis
CLO Issuance
$B
ils.
-
1
2
3
4
Jan
-16
Feb
-16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Aug-1
6
Sep
-16
Oct
-16
No
v-1
6
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
CLO Resets
CLO Refis
CLO Issuance
Euro CLO Issuance, Refis and Resets
€B
ils.
• U.S. CLO issuance has been accelerating after a quiet January 2017; however, the market has
been dominated by refinancings and resets
• European issuance is lower; refinancings and resets also gaining traction
39
U.S. CLO New Issue Spreads Trend Tighter
Source: BAML
50
100
150
200
250
300
350
400
450
500
Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Sp
read
(b
ps)
U.S. CLO New Issue Spreads (AA, AA, A Notes)
AAA
AA
A
200
300
400
500
600
700
800
900
1,000
1,100
Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Sp
read
(b
ps)
U.S. CLO New Issue Spreads (BBB, BB Notes)
BBB
BB
• U.S. CLO note spreads have trended tighter
• In late April, there was a slight uptick in spreads
40
U.S. CLO Reinvestment Periods are
Trending Longer
Source: BAML
0
1
2
3
4
5
6
7
8
03Q
1
03Q
3
04Q
1
04Q
3
05Q
1
05Q
3
06Q
1
06Q
3
07Q
1
07Q
3
08Q
1
08Q
3
09Q
1
09Q
3
10Q
1
10Q
3
11Q
1
11Q
3
12Q
1
12Q
3
13Q
1
13Q
3
14Q
1
14Q
3
15Q
1
15Q
3
16Q
1
16Q
3
17Q
1
Rein
vest
men
t P
eri
od
(years
)
Average U.S. CLO Reinvestment Periods Trend Longer
• Reinvestment periods have been trending longer, with a number of
2017 deals having five-year reinvestment periods
41
U.S. CLO Market Sees Many Refis, Resets
Source: TR-LPC, BAML
On CLO Refis and Resets:
• Most 2.0 CLOs allow equity investors to refinance a CLO deal on a tranche-by-tranche basis after the non-call period.
• New secured notes with lower coupon spreads are generally issued in a refi while the original bonds are redeemed in full using the
proceeds from the refi.
• Equity investors recognize that these deals are now closer than the end of reinvestment and are able to tap debt investors looking for
shorter-WAL bonds with lower coupon spreads.
• Refinancings that extend the reinvestment periods are known as “resets”.
• Because of the change in deal terms, the consent of all noteholders may be required for a reset to be carried out.
• As compared to the issuance of a new deal, the up-front cost of doing a reset is likely lower.
• Equity investors already have some sense of the CLO manager's strategies and if they are pleased with their performance to date, they
might be incentivized to carry out a reset.
• "Rolling over the collateral portfolio" in a reset can also be easier than ramping up a new one from scratch.
• The SEC issued a no-action letter indicating that deals already in place as of December 2014 will not trigger risk retention requirements
if they go through a refi subject to a number of restrictions. Resets do not qualify for this carve-out.
-
5
10
15
20
25Ja
n-1
6
Feb
-16
Mar
-16
Ap
r-16
May
-16
Jun
-16
Jul-
16
Aug-1
6
Sep
-16
Oct
-16
No
v-1
6
Dec
-16
Jan
-17
Feb
-17
Mar
-17
Ap
r-17
U.S. CLO Issuance, Refis and Resets
CLO Resets CLO Refis CLO Issuance
$B
ils.
42
Different Investment Opportunities Exist in
New Issue CLOs, Refis and Resets
Source: BAML
Investment Characteristics
• New Issue CLOs
• Longer duration
• Higher spread
• New portfolio of assets
• Refinancings
• Shorter duration
• Lower spread
• Familiarity with manager
• May have some underperforming assets
in portfolio
• Resets
• Longer duration
• Higher spread
• Familiarity with manager
• May have some underperforming assets
in the portfolio
80
90
100
110
120
130
140
- 1.00 2.00 3.00 4.00 5.00 6.00
Actual Recent Primary BSLCLO Spreads
Reset / New-
Issue from the
primary
market
Refi from the
primary
market
Years Until End of Reinvestment
AA
A S
pre
ad (
bp
s)
U.S. BSL Credit Curve
(AAA Spread vs. Years Until End of Reinvestment)
43
Where will U.S. CLO AAA spreads be in the
2H17?
*Based on a sample of deals where discount margin available
100
110
120
130
140
150
160
170
180
190
Jan-16 Mar-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17
AA
A D
isco
un
t M
arg
in* b
ps
AAA Discount Margins
0%
10%
20%
30%
40%
50%
60%
<100 bps 110 bps 120 bps >130 bps
% o
f su
rvey r
esp
on
den
ts
Where will U.S. CLO AAA spreads be in 2H17?
Source: TR-LPC
• CLO spreads have contracted materially in the past year
• In a recent survey, over 50% of CLO professionals estimated CLO spreads would be around LIB+110 in 2H17
44
CLO Issuance Expected to Meet or Exceed $70B
in 2017
0%
10%
20%
30%
40%
50%
60%
<$40 $40-$50 $50-$60 $60-$70 >$70%
of
surv
ey r
esp
on
den
ts
2017 CLO issuance estimates ($B.)
Full year 2017 CLO issuance estimates
0
20
40
60
80
100
120
140
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Issu
an
ce (
$B
.)
Annual CLO issuance
Source: Wells Fargo, TR-LPC
• While slower than in recent years, U.S. CLO issuance has accelerated in recent months
• In a recent survey, half of CLO professionals expected $70 billion or more of CLO issuance in 2017
45