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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

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

Contacts

Akiko Kato, Director

+1 646-731-1341

akiko.kato@kbra.com

HyunKyeong Kim, Associate

+1 646-731-2459

hyunkyeong.kim@kbra.com

Sean Malone, Managing Director, Co-Head of Global Structured Credit

+1 646-731-2436

sean.malone@kbra.com

Eric Hudson, Senior Managing Director, Co-Head of Global Structured Credit

+1 646-731-3320

eric.hudson@kbra.com

Gabriele Gramazio, Senior Director

+44 20 8148 1001

gabriele.gramazio@kbra.com

Gordon Kerr, Managing Director, Head of European Research

+44 20 8148 1020

gordon.kerr@kbra.com

Yee Cent Wong, Co-Head of Europe

+353 1 588 1260

yee.cent.wong@kbra.com

Media Contact

Adam Tempkin, Director of Communications

+1 646-731-1347

adam.tempkin@kbra.com

Business Development Contact

Jason Lilien, Senior Managing Director

+1 646-731-2442

jason.lilien@kbra.com

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