KBRA Releases Research – Navigating U.S. CLO Tail Risk

KBRA releases a report exploring the increasing number of amortizing U.S. collateralized loan obligation (CLO) transactions that have reached the end of their reinvestment period and are not expected to be refinanced in the near term due to the prevailing rate environment as well as other considerations. As such, they have begun to amortize and return principal to noteholders. The rate of paydown can be influenced by a number of factors that can cause variability in the outstanding life across transactions—or even against expectations at the time of transaction closing. In this report, we explore the amortization profiles of U.S. CLOs.

Key Takeaways

• Market amortization rates at the end of a reinvestment period vary greatly across managers. As of the sixth period after ending reinvestment, senior tranche amortization can range from 4.5% to 80% by manager.
• Vintage matters, as transaction seasoning influences the amortization profile. This is because collateral, documentation, and reinvestment provisions tend to have similarities among the same vintage cohort. Currently amortizing transactions from 2015 are paying down at the fastest rate to a weighted average (WA) AAA-rated tranche factor of 0.19 after seven periods. Conversely, those from 2021 are returning principal at the slowest rate, reaching a WA factor of 0.72 after seven periods.
• The end of reinvestment periods does not mean the end of reinvestments. Certain documentation provisions allow managers to continue making collateral purchases according to specific criteria and circumstances. The fastest amortizing managers tend to execute fewer purchases, on average, during the amortization period.
• Transaction extension exposes the structure to the risk of deteriorating credit quality, as well as defaults that may be associated with adverse selection. Restrictions placed on managers in the post-reinvestment period are designed to mitigate this risk. Such restrictions will be put to the test, given the volume of transactions that have entered, or will enter, amortization periods.

Click here to view the report.

Related Publications

• Private Credit: Business Development Company (BDC) Ratings Compendium: First-Quarter 2024
• European CLOs: Too Big to Hold?
• Recurring Revenue Loan Metrics Dashboard: May 2024 Update
• LSTA and DealCatalyst Annual CLO Conference Recap
• European CLO Manager Style Comparisons: April 2024 Update
• Structured Credit Trend Watch: CLO Issuance in Bloom—First-Quarter Record for Middle Market
• Navigating European CLO Tail Risk: Mind the Amortisation Gap
• Private Credit: Potential for European MM and Direct Lending CLOs

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1005272

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