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CLOs: Price coverage of CLO loans keeps improving
admin | April 12, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
CLO loan pricing and the transparency of performance and risk continue to improve. Between Intex and Markit, unpriced broadly syndicated loan principal in CLO portfolios today has dropped to less than 6 bp. Unpriced loans show wider average spread, lower ratings and more defaults. They also come more frequently from industries with commodity exposure or from computer or electronics businesses. While not all prices are equal, the broad coverage creates a valuable check for CLO investors.
Pricing coverage for broadly syndicated loans has improved dramatically in the last decade (Exhibit 1). As recently as 2012, Intex had missing prices for 70% of loan principal in deals issued since 2010, and Markit had missing prices for 30%. By the middle of 2014, Intex had missing prices for less than 20% and Markit for less than 10%. As of February, Intex had missing pricing for 3.3% and Markit for 0.3%. Combining Intex and Markit left missing prices for less than 6 bp of principal.
Exhibit 1: Price coverage of broadly syndicated loans has improved dramatically
Source: Intex, Markit, Amherst Pierpont Securities calculations
Missing prices do signal slightly higher-than-average loan risk (Exhibit 2). Among loans without either an Intex or Markit price, 6.0% of principal is in default while loans with a price show only 0.2%. Unpriced loans show an average margin of 482 bp while priced loans show 345 bp. Unpriced loans also show a shorter original maturity than priced loans.
Exhibit 2: Unpriced loans show higher-than-average risk
| Statistics |
Has Intex or Markit |
Missing Intex and Markit |
| Balance ($ mm) |
496,373 |
275 |
| % Defaulted |
0.2 |
6.0 |
| Margin (bp) |
345 |
482 |
| WAM |
62 |
33 |
| WALA |
17 |
23 |
| Orig Term |
80 |
57 |
Source: Intex, Markit, Amherst Pierpont Securities
Loans without prices also show a rating distribution skewed to lower categories with a larger share of ‘CCC’ (Exhibit 3). Loans with prices consequently show a relatively higher share of ‘B’ and higher ratings.
Exhibit 3: Loans without prices show a larger incidence of ‘CCC’
Source: Intex, Markit, Amherst Pierpont Securities
Loans without prices also tend to come disproportionately from computer or electronics businesses or industries with energy or commodity exposure (Exhibit 4).
Exhibit 4: Unpriced loans come from technology, energy or commodity sectors
Source: Intex, Markit, Amherst Pierpont Securities
Higher risk in unpriced loans likely argues for lower value than the average of all priced loans. The discount, of course, will depend on each loan’s margin, rating, industry and other factors.
Even of the more than 99.94% of loans with prices, not all prices are equal. Nearly 42% of all priced loans have three or fewer market-makers. Of course, 58% have four or more (Exhibit 5). Fewer market-makers made price less reliable as a measure of tradeable value.
Exhibit 5: Nearly 42% of priced loans have three or more market-makers
Source: Intex, Markit, Amherst Pierpont Securities
Despite its limitations, the broad pricing of CLO loans offers valuable information about CLO loan portfolio performance and risk. The return on each loan and its volatility and correlation with other loans’ offers an alternative to rating agency or analyst views of risk and diversification. Investors in CLOs that use this information well arguably have one of the best and most timely views of collateral quality among investors in securitized products, where most collateral has no visible market price at all.
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