Sam Robinson | sam.robinson@9fin.com and Michelle D’souza | michelle@9fin.com
CLO funds followed up an impressive 2023 with a strong Q1 this year, 9fin data shows. Of the 36 CLO funds listed in the 9fin dataset, none reported a month of negative returns in the first quarter of 2024.
In total, funds in our database averaged cumulative returns of 5.2% across the quarter, with funds that had the flexibility to invest in both mezz and equity returning the highest average of 6.18%.
CLO amortisation and redemptions were one of the main themes of Q1, with eight European CLOs and 39 US CLOs liquidated via BWIC in Q1, according to 9fin data, indicating many equity investors were happy to cash out on CLOs, with loan levels rising and liabilities amortising.
One of the chief headline-generators at the back end of Q1 was the downgrade of Altice France by Moody’s and S&P. 9fin reported at the time that the downgrade alone was unlikely to be massively disruptive to the health of most CLOs, and CLOs exited Q1 with low triple-C buckets in Europe. Even in the US rising triple-C levels have yet to lead to significant par test breaches.
*No exit fees on fund **Structured as closed-end drawdown funds †Fund has quarterly NAV/liquidity broken down into monthly returns ††Fund has at least some marked to model component.
For a full breakdown of fund returns please click here.
US CLO performance
After facing tough arbitrage levels throughout 2023, CLO equity investors have enjoyed a strong start to the year.
“When you hear about this many deals being called, refinanced or reset, it means it’s probably going to be a gangbuster year for equity,” said Jay Huang, head of structured credit investments for CIFC Asset Management, “because people only exercise these options if they’re highly accretive versus holding the equity.”
Most of the positions in CIFC’s portfolio are out of non-call, said Huang, which is key for an environment like this, where it’s vital to have exerciseable options.
“Last year the main opportunities were in secondary mezz”, said Huang, “When double-Bs are trading in the 50-70s, that had a better risk return profile than any equity we saw in the market, but in Q1 2024, the convexity upside shifted to the equity in the secondary market.”
Primary equity has begun to regain some of its appeal, however, with 9fin reporting in March that third party equity investors were starting to make a return to the market.
Huang said CIFC is among those CLO equity investors that has started to come back to the primary market over the past couple of months, “where we’ve closed a few, for the first time since the first half of 2022”.
CIFC’s three listed funds, two in harvest mode and CIFC Opportunity Fund V, which launched last year, returned 6.15%, 8.11% and 9.59% in the first quarter of this year.
The trend looks set to extend in April, with Q2 equity payments largely in and positive. 9fin reported that BofA research showed early US CLO equity payments for April had reached an eight-year peak.
European CLO performance
European CLOs also enjoyed a strong start to the year, with Deutsche Bank research showing European CLO NAVs ended the quarter at 44%, which was up 2.3% from the start of the year.
JP Morgan’s €-CLOIE index showed that European CLO debt had also performed well, with triple-As gaining 1.86% year-to-date (compared to 1.61% for EY HY Corporates) with JP Morgan noting, “€-CLOIE has outperformed $-CLOIE from AAAs to BBs as price gains in European CLOs offset marginally higher coupons provided by US CLOs.”
BK Opportunities Fund-VII, from Crystal Fund, had the highest cumulative Q1 returns, adding 10.41% in the quarter. That fund launched in September 2021 and has made annualised 16.3% returns since inception, according to 9fin data. The fund invests in European CLO mezz tranches.
Supply was strong throughout Q1, with analysts at BofA and Deutsche Bank among others revising upwards their projections for 2024. European CLO performance was also helped by spread tightening.
Triple-As ended the quarter having tightened around 15-20bps into the high E+140bps to E+150bps area. This tightened further in April with Palmer Square setting the European benchmark at E+145bps.
