KBRA released 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, KBRA explores 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.
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The full report is available online: https://www.kbra.com/publications/CPKGsbJJ/navigating-u-s-clo-tail-risk.
