The 2020 Creditflux Manager Awards was the most competitive edition over the event’s 12-year run. Some 621 CLOs were entered into the best CLO categories globally as managers sought recognition for the only industry awards based purely on performance.

This year the methodology for ascertaining the very best CLOs and CLO managers also underwent changes, as we looked to broaden the scope of the metrics we considered. For the first time we looked not only at how much par the manager had built across a CLO’s lifetime, but also how much of a bumper in the junior over-collateralisation test the CLO boasted, and we looked at not only a deal’s weighted average rating factor (warf) score but the size of its triple C buckets.

For the Best US CLO and Best European CLO categories 468 and 153 deals were entered and eligible, a record amount for the Creditflux manager awards. The tables overleaf show that in the US the 2018 vintage of CLOs consistently outperformed across nearly all metrics. This is perhaps unsurprising, given that some metrics, including OC headroom, triple C buckets and warf tend to deteriorate over a CLO’s lifetime.

2018 deals also managed to buck the trend of decreasing distributions to equity. This vintage of CLOs have benefited from historically low financing costs and collateral managers have made the most of this advantage with higher than average returns. 2018 deals on average made 17.21% annualised returns to equity, compared to 14.68% for 2017 deals and 13.30% for 2016 deals. The 2018 CLOs were the ones who benefited from benevolent market conditions, and said conditions were the fact that loans were cheap to source. Debtwire data shows that the weighted average yield of institutional loans increased dramatically in 2018, and CLOs’ average cost of debt was only 1.62%, the tightest in the 2.0 period.

This pattern was not quite as clear among European CLOs. Although 2018 deals boasted the highest average equity distributions, they hewed closer to the average when OC bumpers, warf, weighted average spread (WAS) and weighted average purchase price metrics were considered. The 2018 deals have the lowest average triple C buckets, and European CLOs had lower triple C buckets than their US counterparts, which might explain the relatively minor amount of OC breaches in 2020 among European CLOs.

2018 provided ideal conditions for CLO formation for regulatory reasons too. In February 2018, US CLO risk retention was repealed after a campaign launched by the Loan Syndications & Trading Association. This meant US CLO managers were no longer burdened by putting 5% of the capital into each of their deals.

Overall the arbitrage has become more challenging since the start of last year; in the US the average arbitrage for 2019 deals has dropped to 1.64% from an average of 1.84% among 2018 deals, and in Europe the arbitrage has dropped from 2.06% to 1.86%.

Although all of our finalists in the best new CLO categories managed to achieve impressive arbitrage levels at pricing, differences in strategy are evident. Nassau Capital’s Nassau 2019-II, our winner in the US, actually had a relatively high cost of debt at 2.22% but had an impressive WAS of 4.12%. By contrast in Europe, GSO Capital’s Dunedin Park had a WAS at pricing of 3.81% but had a cost of debt of 1.77% - Alex Leonard noted in his acceptance speech that at the time of pricing it had achieved the tightest triple A spread of the year.

Over time the number of deals considered for the best redeemed CLO has been slowly dwindling. Creditflux’s data shows that only one European CLO was called in 2019, and only 15 US CLOs were eligible for our best US CLO redeemed in 2019 category. For comparison 50 deals called in 2018 were submitted for our 2019 awards and 80 deals redeemed in 2017 were considered for our 2018 awards.

Partly this is because CLO managers are choosing to extend the lives of their deals rather than liquidate them entirely. Partly it is because the 1.0 market is now essentially non-existent: CLO-i data shows that only eight 1.0 deals that have not been reissued are currently outstanding. Of course, one of these deals managed to win the award this year – Symphony’s California Street V, which priced in 2007 and was finally redeemed in April of last year, managed an impressive IRR of 24.27%.

One of the new categories for this year’s awards focused on “non-traditional” CLOs, which sought to acknowledge the innovative new structures which have appeared in the CLO market over the last few years. Bond-flex CLOs, CLOs with a capacity to invest opportunistically in both bonds and loans, are an innovation that existed pre-crisis, but have only relatively recently re-appeared in the 2.0 market.

This year’s winner, Anchorage Capital, has been the most prolific issuer of bond-flex CLOs; the manager priced its 12th deal in 2020. The deals considered in the category, including bond-flex CLOs from four other managers and triple-C flex CLOs, deals with a greater capacity to invest in triple-C rated loans, had considerably different metrics to the deals in the regular CLO categories.

Their triple-C buckets were considerably higher, as triple-C flex CLOs typically have a threshold of 50% and bond-flex CLOs typically have a threshold of 17.5%. This added risk was reflected in the WAS figures – CLOs in this category had an average WAC of 6.38%, compared to an average WAS of 3.56% for US CLOs.

2020 is certainly shaping up to be an interesting year for the Creditflux manager awards.. At the end of 2019 US CLOs averaged a bumper of 3.96 percentage points on their junior OC test, and the lowest recorded among 468 deals was 0.28%. That paints a stark contrast to 2020 where 328 different US CLOs have breached their junior OC test so far. Average equity payments will also be affected as over 200 US CLOs and 11 European CLOs have missed at least one distribution to equity holders as of the latest data in CLO-i.