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What do you want to know? CLOs are a form of securitization which allows the sponsor to create liquidity to recycle capital. CLOs have a predetermined lifespan, usually 5 years, and generally have covenants on the allowable types of collateral, asset mix, leverage levels and reinvestment criteria.
CREFC has a primer on these. Essentially non bank lenders use it as attractive way to clear balance sheet to keep making more loans (historically). If a loan went bad, they’d usually buy it out and put it on a repo line or back on their balance sheet.
Managed deals also gave the issuers flexibility to add new loans into the pools and use them as a partially funded credit line and ramp them up with future loans at set credit criteria (ironically based on their own UW, so pretty easy to game some numbers if you need a home for a loan off BS)
Now with the advent of tighter credit/funding restrictions on Repo lines (and fear of margin calls), coupled with more distress on these transitional properties, you’ll start seeing more specially serviced loans as there’s fewer places to put them.
My thesis is Once a few sponsors bite the bullet on taking losses in the vehicle rather than buying out the assets, the reputational risk is out the door and the loss profiles will start to resemble conduits in time. KBRA had a good study on this in 2022 that essentially confirmed this; in good times issuers did the right thing for investors. now time to see what they’ll do under pressure and with less flexibility.
Those late 2021/2022 vintage 100% MF deals are starting to look a little cuspy.
Nice write up. What kind of loss ratios do you need to see before those are considered impaired? Or how long can sponsors float bad assets before just throwing in the towel via distressed sale or receivership?
Sponsors usually retain the bottom ~20-25% of the securitization as a risk retention piece. The sponsor tranche is usually/mostly unrated so would be very difficult to sell near par if the pool had any sort of impairment. As such, you would think there would be a 25-30%+ tolerance for loss from the sponsor perspective.
Agreed, especially the ones that underwrote stabilized debt yields in the 6s.
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