Egan-Jones CLO* Summary Report (December 2024)

Egan-Jones CLO* Summary Report (December 2024)

*All Egan-Jones ratings in this report are non-NRSRO ratings

Gangbuster - the CLOs issued in Nov. rose from 47 last year to 128 this year, the most ever on record for a single month. The value rose from $17.5B to $44.1B (see Finsight.com)¹. As can be seen from the chart below to the right, coupons have dropped significantly with falling interest rates. The asset yield was near 8.2% while the weighted average tranche coupon was approximately near 6.6%. Hence using the Adjusted Asset Coupon (i.e., including estimated losses) near 7.7%, the resulting pre-expense spread is near 11% for equity (i.e., 7.7% less 6.6% times 10 to reflect the leverage). Given that the 10-year Treasuries were in the 4.2% to 4.4% range for most of November, the arbitrage has become more attractive on a relative basis. Items to watch are the rise in the 10-year yield and the rise in CCC+ or lower assets (chart I-D).

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 November 2024, Egan-Jones rated 1448 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)³ of covered CLO deals. The 25th, 50th, and 75th percentiles of the WARS value were 3684, 3793, and 3933, respectively.

I-B. Diversity Score

Egan-Jones collected the Diversity Score (DS)⁴ of covered CLO deals. The 25th, 50th, and 75th percentiles of the DS value were 56, 64, and 70, respectively.

I-C. Super Senior Tranches Subordination

Egan-Jones collected the senior tranches subordination⁵ (%) (STS) of covered CLO deals. The 25th, 50th, and 75th percentiles of the STS value were 34.4, 35.9, and 38.9, respectively.

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 6.3, 8.2, and 10.9, respectively. Egan-Jones calculated and compared the monthly average value of CLRA data from May 2022 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 the current balance of all deal tranches; Debt balance is the sum of the 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 92.0%, 97.0%, 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 105.0%, 108.0%, and 110.0%, respectively.

II. Tranche Key Metrics Summary

II-A. Tranche Subordination Analysis

The average subordination levels (defaulted assets are valued at market value) of senior tranches and mezzanine tranches tranches were 39.2% and 15.7%, respectively. The 25th, 50th, and 75th percentiles of senior tranche subordination levels (defaulted assets are valued at market value) were 34.4%, 36.0%, and 38.6%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche subordination levels (defaulted assets are valued at market value) were 8.2%, 14.6%, and 21.8%, respectively.

The mean, 25th, 50th, and 75th percentiles of the available subordination of each rating category (includes +/-) can be found in the table above.

II-B. Tranche Coupon Analysis

The average coupon of senior tranches and mezzanine tranches are 5.9% and 8.2%, respectively. The 25th, 50th, and 75th percentiles of senior tranche coupon are 5.9%, 6.0%, and 6.1%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche coupon are 6.6%, 7.5%, and 9.9%, 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 SOFR) of senior tranches and mezzanine tranches are 1.4% and 3.8%, respectively. The 25th, 50th, and 75th percentiles of senior tranche spread (over 3 months SOFR) are 1.3%, 1.4%, and 1.5%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche spread (over 3 months SOFR) are 2.0%, 3.0%, and 5.6%, respectively.

The mean, 25th, 50th, and 75th percentiles of the available spread (over 3 months SOFR) 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):

1. Our rating is derived from estimated losses.

2. The probabilities of default utilized are generally more conservative than industry standards.

3. Generally, our ratings are more heavily model-driven and take into account fewer subjective assumptions.

4. Generally, we update the cash flow and ratings monthly based on the availability of the trustee reports.

5. Our analysis is conducted using information and cash flow engines supplied by a recognized industry provider.

6. For some transactions, when senior tranches are being paid down/off, our ratings on subordinated tranches generally move higher than the initial rating due to the improved tranche subordination and resulting in less estimated loss. To avoid confusion, we exclude from the chart above the impacted transactions. (AGL 2020-3A, AMMC 2016-18A, ANCHF 2021-14A, ANNSA 2016-2A, APID 2015-22A, APID 2017-26A, ARES 2018-49A, ATRM 14A, BALLY 2018-1A, BCRK 2015-1A, BSP 2016-9A, BSP 2019-17A, CANYC 2012-1RA, CBAM 2017-1A, CGMS 2013-1A, CIFC 2017-4A, CIFC 2018-1A, CLRCK 2015-1A, DRSLF 2017-47A, FLAT 2018-1A, GALXY 2015-21A, GOCAP 2015-26A, HLA 2015-3A, HLA 2017-1A, HLA 2017-2A, HLM 11A-17, JMP 2017-1A, JMP 2018-1A, KKR 13, KKR 18, KKR 9, LCM 15A, LCM 38A, MAGNE 2018-20A, MCLO 2015-8A, MORGN 2018-2A, MP10 2017-1A, MVEW 2017-1A, MVEW 2017-2A, NCC 2017-IIA, OCT32 2017-1A, OZLM 2017-17A, REG15 2018-4A, ROCKT 2017-2A, TCW 2018-1A, TFLAT 2017-1A, UPLND 2016-1A, VENTR 2014-18A, VENTR 2015-22A, VENTR 2017-27A, VIBR 2017-7A, VOYA 2016-2A, VOYA 2017-1A, VOYA 2019-1A, WELF 2016-2A, WELF 2017-2A, ZAIS7 2017-2A, ZCCP 2018-1A)

III. Pool Asset Key Metrics Summary

This section summarizes 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

Footnotes and sources

1. https://finsight.com/collateralized-loans-clos-abs-bond-issuance-overview?products=ABS&regions=USOA

2. Adj asset coupon means gross asset coupon minus the asset estimated losses which is assumed 50% of loss given default.

3. Weighted Average Rating Score is derived from a 10-year default rate and used to calculate the weighted average default probability of the portfolio.

4. Diversity Score represents the number of independent, identical assets that we can use to mimic the default distribution of the actual portfolio.

5. Tranches Subordination is calculated as (Collateral Value - (Pari-Passu Balance + Senior Balance)) / Collateral Value. Defaulted assets are valued at market value.

For more details, please refer to Egan-Jones's CLO methodology.