Egan-Jones CLO* Summary Report (May 2024)
Record Issuance - The modest decline in interest rates since October has provided tailwind for CLO issuance. This has manifested in 10-year treasury yields declining from a recent high of 4.93% as of October 19, 2023 to 4.5% as of May 10, 2024 (source: FRED). April broke records for issuance volume and count (85 CLOs) since November 2021 (94 CLOs) according to Finsight¹. As can be seen in the below right chart entitled “Weighted Average Asset Coupon vs. Tranche Coupon”, the adjustment for estimated losses to the asset coupon (difference between blue and green lines) is marginally greater than it has been at any point over the past two years. A comforting sign in the rise in senior tranche subordination (Chart I-C) but CCC+ or Lower Rating Percentages have increased a bit. Interestingly, the range of CLO leverage is roughly twice as wide as it was in May 2022 although the median remains similar (Chart I-E).
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 April 2024, Egan-Jones rated 1525 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 3695, 3806, and 3917, respectively. Egan-Jones calculated and compared the monthly average value of WARS data from May 2022 to this month. The mean value of WARS has increased over the observed period, which indicates the overall default risk might be increasing.
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 57, 63, and 70, respectively. Egan-Jones calculated and compared the monthly average value of DS data from May 2022 to this month. The mean value of DS has decreased over the observed period, which indicates the diversity level of the portfolios might be decreasing.
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, 36.2, and 38.7, 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, 7.9, and 9.7, 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 precentage of lower-rated assets might be increasing.
I-E. CLO Leverage Summary
Note: Deal balance is the sum of current balance of all deal tranches; Debt balance is the sum of 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 94.0%, 98.0%, and 100.0%, respectively. The 25th, 50th, and 75th percentiles of the debt balance to collateral balance (current non-equity tranches balance / current collateral balance) were 106.0%, 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 38.1% and 15.6%, respectively. The 25th, 50th, and 75th percentiles of senior tranche subordination levels (defaulted assets are valued at market value) were 34.5%, 36.2%, and 38.6%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche subordination levels (defaulted assets are valued at market value) were 8.1%, 14.9%, and 21.8%, respectively.
The mean, 25th, 50th, and 75th percentiles of the available subordination of each rating category (includes +/-) can be found in table above.
II-B. Tranche Coupon Analysis
The average coupon of senior tranches and mezzanine tranches are 6.6% and 8.8%, respectively. The 25th, 50th, and 75th percentiles of senior tranche coupon are 6.6%, 6.7%, and 6.9%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche coupon are 7.3%, 8.2%, and 10.7%, 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 1.5% and 3.8%, respectively. The 25th, 50th, and 75th percentiles of senior tranche spread (over 3 months SOFR) are 1.3%, 1.4%, and 1.6%, respectively. The 25th, 50th, and 75th percentiles of mezzanine tranche spread (over 3 months SOFR) are 2.1%, 3.1%, and 5.8%, 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 updates the cashflow 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.
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
Notes
Adj asset coupon means gross asset coupon minus the asset estimated losses which is assumed 50% of loss given default.
Weighted Average Rating Score is derived from 10-year default rate and used to calculate the weighted average default probability of the portfolio.
Diversity Score represents the number of independent, identical assets that we can use to mimic the default distribution of the actual portfolio.
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.
Appendix
Links to Egan-Jones CLO reports: https://portal.egan-jones.com/non-nrsro-ratings/clo
