AN INDUSTRY NEWSLETTER FOR THE GLOBAL CLO MARKET OCTOBER 2023
US and European CLO Market Reviews Listings Update Bringing You CLOser
Bain Capital explores importance of equity arbitrage as a key metric for CLO issuance
The Maples Group global CLO team provides Cayman Islands and Irish legal advice and CLO issuer / co-issuer and fiduciary services in the Cayman Islands, Delaware, Dublin, Jersey, London and the Netherlands. This edition of The CLOser1 includes:
2
US CLO Market Review
7
European CLO Market Review
10 Global Listings Update You CLOser 12 Bringing Bain Capital explores importance of equity arbitrage as a key metric for CLO issuance
Data in this publication is derived from a variety of sources, including the Maples Group, Structured Credit Investor, Intex, LCD, Leveraged Loan, Creditflux, Moody's, S&P, Fitch, Euronext Dublin and Central Bank of Ireland.
1
October 2023 | 1
What's Inside
The Maples Group is delighted to present our October 2023 edition of The CLOser. In this edition we: •
Bring you CLOser to the inside market view, with insights from Bain Capital;
•
Present key market updates from our US and European CLO markets;
•
Take a look at latest trends in global listings; and
•
Get to know Partner James Reeve at Maples and Calder, the Group's law firm; and Vice President Sheraim Mascal in the Group's fiduciary team, currently on secondment to our Jersey office.
We very much hope you enjoy this edition and find the content engaging and informative. Best wishes from the Maples Group CLO Team.
2 | The CLOser
US CLO Market Review In this US CLO market review, we provide our observations and analysis in respect of activity year-to-date, focusing largely on transactions with Maples Group involvement. First, however, we detail below the eagerly anticipated de-listing of the Cayman Islands from the EU's AML list, including likely steps towards such de-listing and the possible timeline.
EU AML Listing Update For more background on this subject, please refer to the US CLO market review in our May 2023 edition of The CLOser 2 EU amends Art. 4 of EU Scrutinisation Regulation prohibiting ‘SSPEs’ on EU AML List
FATF Plenary - confirmed the Cayman Islands has satisfied final Recommended Action on technical compliance and effectiveness
FATF Plenary anticipated removal of Cayman Islands from grey list assuming successful onsite visit
APR 2021
JUN 2023
OCT 2023
FEB 2021
MAR 2022
SEPT 2023
Q1 2024
FATF added Cayman Islands to list of jurisdictions under increased monitoring (the FATF “grey” list)
EU added Cayman Islands to the EU AML List
FATF ‘onsite’ visit to Cayman Islands completed - prerequisite to de-listing
De-listing from EU AML List?
The timeline above provides a summary overview of the key stages in our listing and de-listing process. By way of update on the latest position, however, we can confirm the following: •
•
2
On 23 June 2023, the Financial Action Task Force ("FATF") confirmed that the Cayman Islands had satisfied all FATF Recommended Actions ("RAs"), recognising that the jurisdiction has a robust and effective AML / CFT regime. This follows a detailed review of the steps taken by the jurisdiction to fully satisfy the FATF's 63 RAs. The FATF's decision was a welcome recognitiOn of the Cayman Islands as a jurisdiction that is fully committed to implementing international standards. Assuming a successful completion of the onsite inspection by the FATF referred to below, the jurisdiction will be eligible to be removed from the FATF's "Monitoring List" (or "grey" list), i.e. the list of jurisdictions under increased monitoring in the area of AML / CFT / CPF at the FATF's October 2023 plenary.
The CLOser - May 2023 (maples.com)
•
It is expected that de-listing would trigger the jurisdiction's removal from the EU's AML / CFT List ("EU AML List") in due course. The Ministry of Financial Services and Commerce of the Cayman Islands continues to hold direct discussions with EU officials with a view to making progress on regime enhancements to facilitate the jurisdiction's removal from the EU's AML List. A delegation from the Americas Joint Group ("Joint Group"), a subworking group of FATF's International Co-Operation Review Group (ICRG), completed its onsite visit to the Cayman Islands on 1 September 2023.
•
The Joint Group will prepare an onsite visit report, which will be presented at the upcoming FATF Plenary in October – at which point the Cayman Islands will receive confirmation as to whether it will be removed from FATF's Monitoring List. Assuming the Cayman Islands is indeed removed then we are optimistic that the jurisdiction will be removed from the EU AML List during Q1 2024, when such list is next updated.
October 2023 | 3
Slightly improved market and confidence, with more aged warehouses proceeding to a successful CLO and generally less erratic and opportunistic behaviour
In terms of issuer jurisdiction, back in May 2023 we reported that across the US CLO market as a whole, during the period in which the Cayman Islands has been on the EU AML List, Cayman Islands and Jersey SPVs, collectively, were employed in around 82% of the priced deals, with quite notably only around 6% opting for Bermuda SPVs. As can be seen from Figure 2, this position remains largely unchanged when we now look again at US CLOs priced YTD. 42% 40%
12%
Once the Cayman Islands is formally removed from the EU AML List, the restrictions under the EU Securitisation Regulation will cease to apply and SSPEs for purposes of said Regulation will again be permitted to be established in the Cayman Islands thereby eliminating the need for utilisation of alternative jurisdictions such as Jersey or Bermuda. The Maples Group will issue further guidance and updates in due course.
'Priced' US CLOs – Number and Issuer Jurisdiction At the time of writing, a total of approximately 188 US CLOs were priced year-to-date. Of those 188 priced deals somewhere in the region of 88% employed an 'offshore', i.e. non-US domiciled, SPV as issuer. The Maples Group acted on ~60% of those transactions employing a Jersey issuer and between 48-50% of all offshore-issuer deals, giving us a leading market share among offshore service providers. Among the deals on which the Maples Group was engaged, around 48 different CLO managers were represented, which is illustrated in Figure 1. Around 63% of those managers had one deal only, with the remainder issuing between 2-5 deals.
6%
Figure 2: SPV Jurisdiction – US CLO Market as a Whole Turning to the jurisdictional split in terms of closed CLOs on which the Maples Group was engaged, we see from Figure 3 that around 59% had Jersey SPV issuers. Breaking that figure down into: a) SPVs that migrated from the Cayman Islands to Jersey; and b) SPVs that were incorporated at the outset in Jersey, the percentages are 47% and 11% respectively, which is a significant shift from the 26% and 28% figures reported in May 2023. This shift is to be expected however; over time, there will inevitably be fewer pre-existing Cayman Islands warehouse vehicles needing to migrate out of the Cayman Islands for CLO close. Figure 3: Closed CLOs with the Maples Group – Issuer Jurisdiction Cayman Islands Incorporated
Figure 1: Closed CLOs with the Maples Group – YTD by Manager
Issuer
Jersey Incorporated
47% Jurisdiction
41%
Split
12%
37%
2-5 DEALS
63%
1 DEAL ONLY
Migrated to Jersey
In Figure 4, we have illustrated our CLO closings further, by way of jurisdiction of incorporation of the issuer SPV. The arrows shaded from blue to orange indicate a closing date migration of a CLO issuer from the Cayman Islands to Jersey. Again, as expected, it can be seen that the frequency of migrations is diminishing over time as a greater proportion of EU risk retention-compliant deals are closing with an SPV issuer incorporated in Jersey from the outset.
4 | The CLOser
Jersey
Cayman Islands Cayman Islands Incorporated January
February
March
April
Migrated to Jersey
May
June
Figure 4: Closed CLOs with the Maples Group – Issuer Jurisdiction & Migrations
July
Refi
Warehouse
November
12
70% 60%
>75%
50% 40%
No Listing
30% 20% 10% 0%
Jan
Feb Mar Apr May
Jun
Euronext
July Aug Sept
CISX
ISE
No Listing
Trustee Market Shares US Bank appeared to have the clear majority of deals, with Citibank and BNYM in second and third place respectively. Those top 3 trustees enjoyed, collectively, engagement on 80% of our closed CLOs (see Figure 7).
170% 160% 150% 140%
137%
Listing Trend YTD
80%
180%
165%
10
October
90%
Closing Activity
14
131%
September
100%
•
Figure 5: CLOs with the Maples Group – Activity by Month Reset
August
Figure 6: CLOs with the Maples Group – Stock Exchange Listings by Month and Listing Trend YTD
Due to the various market challenges in 2023, activity has at times been erratic as market participants seek to seize opportunities. That general picture is reflected in the Maples Group's US CLO activity by month provided in Figure 5. Although March and June were our busiest months for CLO new issuance closings, the most recent month of September has been our most active overall, with a healthy dose of new issuance, refinancings and resets and new warehouses opening. We have also had instructions to incorporate approximately 20 new SPVs over the last two months, which is a slight uptick over the two months prior.
New Issue
Jersey Incorporated
Figure 7: CLOs with the Maples Group - Trustees
130% 120% 110%
8
6
76%
76%
82%
89%
82%
62%
4
State Street
100% 90%
Computershare
80%
Wilmington
70%
Deutsche Bank Trust Company Americas
60%
The Bank of New York Mellon
50%
2
40%
Citibank
30%
U.S. Bank Trust Company National Association
20% 10%
0
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sept
0%
Additional trends and observations based on closed CLOs in which the Maples Group was engaged: •
Listings Around 25% of CLOs that closed during the review period saw their notes being listed on a stock exchange. As illustrated in Figure 6, there were more listings on the Cayman Islands Stock Exchange (12%) than on Euronext Dublin (10%), with one deal being listed on The International Stock Exchange - Jersey. For more detailed insight on listings, please refer to our Listings Update on page 10.
•
Average Deal Size, Price-to-Close Periods and Warehouse Duration Overall, across all our closed US CLOs YTD, average deal size stands at around US$405 million. Although we note that there have been some signs of larger deal sizes in recent days and weeks there is no identifiable trend based on the dispersion in the data presented below (see Figure 8). In terms of warehouse duration on closed CLOs, the cumulative average time period spent in warehouse is just over nine months, although if one factors out a few extreme anomalies, it would be more in the region of eight months. Notable from the scatter chart in Figure 8, there is an upwards trend observed in correlating warehouse duration, which
October 2023 | 5
indicates that some of those older warehouses are now proceeding to a successful CLO. With regards to priceto-close periods, we see a hint of an upwards trend, perhaps as a result of fewer 'print-and-sprint' deals in Q3 versus Q1 / Q2. On average, the periods between pricing and close at present are around 35 days.
•
Warehouse Duration vs. Jurisdiction Correlating warehouse duration with issuer jurisdiction, as depicted in Figure 10, gives a possible hint as to the impacts of marketing in EU. When we reported on this data back in May 2023, average warehouse duration for Jersey SPV issuers was largely static (at slightly below five months). We now see a shift with warehouses for Jersey issuer deals trending longer and warehouses for Cayman Islands issuer deals trending shorter. Factoring out the warehouse SPVs that migrated from the Cayman Islands to Jersey, however, average warehouse duration on the Jersey issuer deals stands at around 190 days or just over six months, versus around 311 days or over 10 months for the Cayman Islands.
The combined observations above perhaps evidence a slightly improved market and confidence, with more aged warehouses proceeding to a successful CLO and generally less erratic and opportunistic behaviour. Days in Warehouse
Days Priced Linear (Days Priced)
Linear (Days in Warehouse)
$700,000,000
700
$600,000,000
600
$500,000,000
500
$400,000,000
400
$300,000,000
300
$200,000,000
200
$100,000,000
100
$0 Dec
Jan
05/12/2022
Feb
24/01/2023
Mar
Apr
15/03/2023
May 04/05/2023
Jun
Jul
23/06/2023
Aug 12/08/2023
Sep
Oct
01/10/2023
Figure 10: Warehouse Duration on EU and Non-EU Risk Retention Compliant CLOs
0 Nov
800
Number of Days in Warehouse
Amount in USD
Linear (Deal Size)
Number of Days
Deal Size
700 600 500 400 300 200 100
20/11/2023
CLO Closing Date
0 01/01/2023
Figure 8: CLOs with the Maples Group – Deal Size, Warehouse Duration and Price-to-Close Period •
Loan Tranches Approximately 20% of CLOs included loan tranches, an increase based on prior recent trends, but largely due to a spike in March (see Figure 9).
•
CLOs with Closing Mergers No particular trend is observed in this regard, with around 13-15% of deals involving a separate warehouse vehicle that merges with and into a separate CLO issuer at / around closing (see Figure 9).
•
Income Note Issuers Again, no particular trend is observed in this regard, with around 7% of deals having this feature, which are usually investor driven requirements and often necessary to achieve a different tax treatment.
Number of Days in Warehouse
5 4 3 2 1
CLOs with Loans
CLOs with a Merger
Jun
Log. (Cayman Islands Issuer)
600 500 400 300 200 100 0 05/12/2022
May
Log. (Jersey Issuer)
Warehouse Providers The warehouse providers on closed CLOs with the Maples Group are shown in Figure 12.
700
6
Apr
08/09/2023
•
800
Mar
20/07/2023
Cayman Islands Issuer
Warehouse Financing - Debt and Equity The scatter plot in Figure 11 suggests that, over time, the positive impacts of including equity investment in CLO warehouses (38% of deals) with respect to warehouse duration is tending to diminish, with CLOs associated with those warehouses taking longer to close. Pure debt arrangements are resulting in shorter warehouse durations although the general trend in the review period, as noted above, is for warehouse duration to be increasing.
7
Feb
31/05/2023
•
8
Jan
11/04/2023
Jersey Issuer
Figure 11: Warehouse Financing Arrangements – Debt and Equity
Figure 9: CLOs with the Maples Group – Closed Deal Features
0
20/02/2023
Jul
Aug
CLOs with Income Notes
Sep
24/01/2023
15/03/2023
04/05/2023
23/06/2023
12/08/2023
01/10/2023
Without Pref Shares
With Pref Shares
Linear (Without Pref Shares)
Linear (With Pref Shares)
20/11/2023
6 | The CLOser
Figure 14: Warehouse Vintages
79%
76%
77%
72% 73%
8
57%
60%
60% 50%
50% 40%
Natixis Securities Americas LLC
Percent of WH vintage proceeding to CLO
Mizuho Bank
0%
2%
4%
6%
8%
10%
12%
14%
Update Regarding Open Warehouses In the last edition of The CLOser published in May 2023, we reported having approximately 88 'open' warehouses on our book of deals. At the time of writing, that figure now stands at approximately 86 and the jurisdictional split, as illustrated in Figure 13, is 53% Cayman Islands and 47% Jersey. The average age of those open warehouses is currently around 9.2 months, which reflects an increase based upon figures quoted in May.
OPENWarehouses WAREHOUSES Figure 13: Open – Jurisdiction Split
16%
2023 Market Conditions and Outlook While 2023 has been challenging and issuance year-todate is significantly down on the same period in 2022, we are on a par with pre-pandemic years and there is scope for optimism as arbitrage conditions improve and general market confidence strengthens, although recent increased geopolitical risks will inevitably have an impact. Nevertheless, our expectation is that some managers who have not yet issued during 2023 may try to seize an opportunity to get a deal done pre-year end, which combined with a steady flow of refinancings and resets may result in a relatively strong year overall in historical terms. For further details, please contact:
JERSEY
47%
86
53%
CAYMAN ISLANDS
It is quite interesting to take a more in-depth look at those open warehouse based upon their 'vintage' and to assess what percentage of warehouses of each vintage successfully proceeded to a CLO (data reflected in Figure 14). As expected, the older vintages have mostly all proceeded to a CLO and as we progress to the newer vintages, we see the obvious trend develop. What is particularly helpful from the data, however, is identification of the anomalies. For instance, of all the warehouse vintages sitting below the hatched trend line, the vintages of note are those opened in September 2022, November 2022 and April 2023. Separately, also depicted are the number of open warehouses by month opened.
0
Poly. (Percent of WH vintage proceeding to CLO)
MUFG Bank, Ltd. Deutsche Bank
Sep-23
Oct-22
Dec-22
Nov-22
Sep-22
Jul-22
Jun-22
Apr-22
May-22
Jan-22
Feb-22
Mar-22
Dec-21
Oct-21
Jul-21
Number of open warehouses
Nov-21
Sumitomo Mitsui Trust bank, Limited
2
0%
Sep-21
0%
Jun-21
Canadian Imperial Bank of Commerce Nomura Corporate Funding Americas, LLC
4
8%
Aug-21
10% Apr-21
20%
33%
0%
May-21
BNP Paribas Credit Suisse
6 43%
43%
40%
33%
Jan-21
30%
Feb-21
Royal Bank of Canada
Mar-21
Wells Fargo Bank, National Association
Aug-22
Jefferies Structured Credit LLC
Jul-23
Barclays Bank PLC
10
79%
Aug-23
70%
88%
88%
Jun-23
Citibank, N.A. Bank of America, N.A.
93% 94%
90%
Apr-23
80%
94%
Mar-23
90%
91%
May-23
Morgan Stanley Goldman Sachs Bank USA
12
100%
100%
Jan-23
100%
JPMorgan Chase Bank, National Association
Feb-23
Figure 12: CLOs with the Maples Group – Warehouse Providers
James Reeve +1 345 814 5129 james.reeve@maples.com Scott Macdonald +1 345 814 5317 scott.macdonald@maples.com
October 2023 | 7
European CLO Market Review Year-to-Date in 2023 The European CLO market has faced challenging macroeconomic and geopolitical events since 2022. Many market participants expected inflation to ease off and reduce the pressure on the European Central Bank to raise interest rates at the start of 2023. However, this prediction did not materialise and the cycle of increasing interest rate hikes has weighed heavily on new CLO issuance, narrowing the spread between the funding costs and underlying interest rates. This has affected the European CLO refi market the most, which has not seen a new refinancing since February 2022 – albeit since August we are seeing signs of life in that market again. Another challenge for the European CLO market is the low activity in the leveraged loan market, with year-on-year volumes down over 50%. Despite these challenges, there are signs that the European CLO market is weathering the storm and entering a period of relative stabilisation, with activity levels steady compared to 2022 levels. As of the time of writing, there have been 36 new 2023 deals year-to-date, representing €15.10 billion, with five new European CLOs priced in August 2023 (totalling €3.7 billion of issuance in the third quarter of 2023 so far). These deals have been brought to market by debutant managers as well as experienced Euro CLO market players and we continue to represent debutants both with initial warehouses open and in earlier planning stages.
Activity is likely to remain concentrated on some managers bringing longerdated warehouses to fruition as conditions improve
In addition, expectations are building that the drought in refis / resets will ease by the end of the year as credit conditions are improving and particularly as 2022 vintages roll off their non-call periods. From our perspective, established platforms continue to have a clear path to issuance, with a number of well-known managers pricing and opening new warehouses at their normal tempo. We expect this trend to continue into 2024. This is very encouraging as it reflects the continued underlying strength of the European CLO offering, which remains in good shape supported by robust fundamentals, despite the numerous challenges of the wider macro and market pictures.
8 | The CLOser
EU / UK Regulatory Developments
Looking Ahead in 2023
On the legislative front, it was a busy summer with a number of interesting market developments. The European Commission adopted the text of the regulatory technical standards on risk retention on 7 July 2023 (the "RTS") pursuant to Article 6(7) of Regulation (EU) 2017/2402 (the "EU Securitisation Regulation"). The RTS will now be reviewed by the EU Council and the European Parliament and are expected to come into force early next year at the latest. The adoption of the RTS brings to an end a period of uncertainty in the market, as the first drafts were originally published in 2018. The RTS address the ways in which risk may be retained in a securitisation structure, how to measure the required level of retention, the impact of the fees paid to a retainer on the effective material net economic interest and the conditions for exempting transactions based on a transparent index. The publication of the RTS has been welcomed with market commentators being of a similar view that it verifies accepted practice in retainer structuring and provides certain clarity in relation to originator substance tests.
Market analysts who have, as of the date of writing, issued predictions for the final quarter of 2023 are cautiously optimistic with an expectation that 2023 could see issuance levels of north of €20 billion. A view is also forming that 2024 will see further positivity enter the market with issuance increasing further throughout the year. Based on our conversations with managers and the warehouse analysis we have undertaken, we believe that activity is likely to remain concentrated on some managers bringing longerdated warehouses to fruition as conditions improve, while the most active managers continue to take advantage of their present strategic advantages to open and bring new pipeline to market while conditions favour them.
Since Brexit, the EU Securitisation Regulation has been onshored into the UK by the European (Withdrawal) Act 2018 (the "UK Securitisation Regulation"). However, in early July, HM Treasury published a "near final" draft of the Securitisation Regulations, 2023 statutory instrument (known as the "Securitisation Regulations, 2023"). The Securitisation Regulations, 2023 are intended to replace the UK Securitisation Regulation and associated secondary legislation. A consultation period for technical comments closed in early August and it is expected that the Securitisation Regulations, 2023 will be passed into law early next year. On the policy side, the Maples Group has contributed in recent months to a number of industry consultations. As part of the Irish government's flagship 'Funds 2030' review of Ireland's domicile-competitiveness, we have contributed to a number of industry submissions on the operation of the section 110 SPV (used as the CLO issuer and originator-retainer in the EU CLO market) and the future optimisation of that vehicle over the coming years within the Irish, EU and global financial markets infrastructure.
EU Warehouses Proprietary Analysis In recent months, the Maples Group Dublin team has conducted an in-depth analysis of the stock of CLOs incorporated in Ireland in the two years prior to 31 August 2023 (the "Review Period"). As part of this analysis, some of the key metrics we have tracked are the number of warehouses and the duration for which they are open at a given time. In our experience, these metrics are indicators of the overall health of the market and act as bellwethers to potential challenges that may lie ahead. Please note there will likely be a small error rate embedded in these, for example, based on relevant filings being incomplete, delayed, etc. (e.g. a warehouse may have been wound up but the liquidator has not been appointed or related filings completed). But on the whole, we have calculated and assumed on a prudent basis. It will be interesting to run this exercise again in early 2024, to follow, for example, whether the warehouse maturity has evolved and whether that aligns with prevailing market narratives at that point.
160
~
160
NEW IRISH CLO SPVs ~ NEW IRISH CLO SPV INCORPORATED IN THE REVIEW PERIOD INCORPORATED IN THE REVIEW PERIOD.
VS NO ET
160
October 2023 | 9
50 67 14
21%
MANAGERS HAVE MORE THAN ONE OPEN WAREHOUSE
WAREHOUSES CURRENTLY OPEN 1
MANAGERS WITH WAREHOUSES OPEN
OF THE SIXTY SEVEN: MORE THAN 12 BUT LESS THAN 18 MONTHS OLD
The sub-six months population is stronger than expected given wider market conditions, but is an encouraging sign of sentiment. Care should be taken in respect of the 18 month plus population as there is a stronger risk of liquidation filings lag here.
25
53
53
% OF TOTAL OPEN WAREHOUSES LISTED ON THE VIENNA MTF
10%
ARE OPEN LONGER THAN 18 MONTHS
53%
ARE LESS THAN SIX MONTHS OLD
% OF TOTAL OPEN 6 DEUTSCHE WAREHOUSES LISTED ON THE VIENNA MTF
APPROXIMATE # OF SPVS INCORPORATED WITH NO WAREHOUSES OPEN YET
%
MORE THAN 6 BUT LESS THAN 12 MONTHS
30 BNY 22 US BANK
%
Of these, 12 are likely active projects given they are incorporated in 2023 with the balance suggestive of abandoned projects or SPVs being retained for recycling for warehouses to be negotiated.
15%
6 CITI
2 LAW DEB 1 WELLS FARGO 0
5
10
15
20
25
30
TRUSTEE MARKET SHARE (OF OPEN WAREHOUSES)
The trend to list EU warehouses arose out of particular market needs during the COVID period. While these have largely ameliorated, listing the warehouse equity continues to be popular, albeit most likely latterly driven by the wide variety of particular originator / retainer structures and the structuring of CLO equity funds – that is, by manager need rather than wider market infrastructure requirements.
For further details, please contact:
Stephen McLoughlin
+353 1 619 2736 stephen.mcloughlin@maples.com
Callaghan Kennedy
+353 1 619 2716 callaghan.kennedy@maples.com
Rory Beasley
+353 1 619 2084 rory.beasley@maples.com
Joe O'Neill
+353 1 619 2169 joe.oneill@maples.com
1. Please note there may be some variance in these figures for structures such as permanent warehouse facilities and warehouses that have been combined or wounddown commercially (but not yet legally).
Global Listings Update
October 2023 | 11
Ireland In the first six months of 2023, we saw a total of 48 CLOs obtain a listing on Euronext Dublin. This was a small uptick on the activity in the second half of 2022. Of these listings, 32 were for Irish issuers, 7 were for Jersey issuers, 4 were for Bermudan issuers, 3 were for US-based issuers and 2 were for Cayman Islands issuers. The Maples Group's Dublin office acted as the listing agent for 33% of these CLOs, which was also an increase on the figures from the second half of 2022. For further details, please contact:
Ciaran Cotter
+353 1 619 2033 ciaran.cotter@maples.com
Cayman Islands For the first three quarters of 2023, listings of CLOs on the Cayman Islands Stock Exchange ("CSX") have kept pace with general market conditions in the CLO space. Through to 15 September 2023, 18 CLOs listed on the CSX and one European CLO issuer listed its warehouse notes on the CSX. The Maples Group listed 47% of all the CSX-listed US and European CLOs during this period. To be sure, 18 CLOs listing on the CSX during the first nine months of 2023 is a decline in listing volume when compared to the same period in 2022, which saw 29 CLOs list on the CSX. This decline is, at least in part, tied to the primary market challenges faced in 2023, including higher interest rates, wider spreads in pricing and a drop in US leveraged loan issuance. But what the lower listing volume really reflects is the absence of a viable refinancing market for most of this year. Thus far in 2023, 100% of the CLO listings on the CSX have been new issuance CLOs. Over the same period in 2022, 31% of the CLO listings on the CSX involved refinanced or reset notes. Lately, however, there have been some signs of a re-emergence of the refinancing and reset market: in August we saw the first CLO refi price in 15 months; and over the last month, we have seen an increase in deals getting called for refinancing. Over a year and a half has now passed since the European Commission added the Cayman Islands to its list of 'high-risk third countries' identified as having strategic deficiencies in their anti-money laundering / counterterrorist financing regimes ("EU AML List"), and not surprisingly, we are still seeing a jurisdictional split in the incorporation of US CLO issuers.
Of the 18 new listings thus far in 2023, nine or 50% were by Cayman Islands issuers with a Delaware co-issuer; seven or 39% were by Jersey issuers with a Delaware co-issuer; and one or 6% was by a Bermudian issuer with a Delaware co-issuer. This is consistent with the jurisdictional split we saw during the same period in 2022, with 48% of the listings by Cayman Islands issuers, 28% by Jersey issuers and 10% by Bermudian issuers. This also highlights the fact that the market has firmly settled upon Jersey as the primary alternative jurisdiction for the CLO issuer when the Cayman Islands is not available. Middle market CLO issuers, though, still appear to favour Delaware-incorporated issuer vehicles; and one such issuer has listed on the CSX this year, accounting for 6% of the new CLO listings. The Maples Group listed 44% of all the CSX-listed CLOs during this period, including 33% of the Cayman Islands issuers and 71% of the Jersey issuers listed on the CSX. Listing of CLO notes is driven by the investors. While the CSX remains a popular choice for investors who require a listing on a recognised stock exchange, it is clear that in the current market, many investors do not require a listing of their CLO notes. At one time it was common to see every tranche of CLO notes, from the triple As through to the subordinated notes, listed on a recognised stock exchange. It is now the norm to see the listing of a single tranche of notes, or a couple of the senior secured tranches, listed. The CLO listings on the CSX this year reflect this trend. Of the 18 CLOs listed on the CSX to date, only one CLO issuer listed its subordinated notes, and only three CLO issuers listed all of their secured notes. In contrast, an overwhelming 83% of the CLO issuers listed between one and three tranches of notes, with 27% listing only a single class of CLO notes on the CSX. Thus far in 2023, March and May were the most active months for CLO CSX listings, with four new CLO listings in each of those months. However, the first two weeks of September has seen three CLOs list on the CSX, which is an encouraging sign. Recent data indicates that triple A spreads have been tightening, and if the called deals find favourable market conditions for a refinancing or a reset, the last quarter of 2023 will undoubtedly see an uptick of new issuance and refinancing CLO listings on the CSX. For further details, please contact:
Amanda Lazier
+1 345 814 5570 amanda.lazier@maples.com
12 | The CLOser
Bringing You CLOser Our sixth 'Bringing you CLOser …' inside view from recognised CLO industry participants and experts. In this edition, we hear from Bain Capital regarding CLO equity arbitrage
October 2023 | 13
CLO Equity Arbitrage: The Metric Driving Issuance in a US$1Trn+ Market
Exhibit 2:
What is the arbitrage? And how has it evolved in the post GFC era ("CLO 2.0s")?
-40 bps
AAA:
Collateralised loan obligations (CLOs) are securitisations which invest primarily in diversified pools of broadly syndicated loans (BSLs). CLOs finance these asset purchases with a capital structure, split into debt tranches rated AAA through single-B, and an unrated equity class.
Base Rate + 1.70%
Assets:
Base Rate + 3.70%
CLO returns are driven by arbitrage, or the difference between the cost of debt and the spread generated by the pool of loans, net of any gains / losses and transaction fees. This excess spread or Arb can vary quite a bit depending on the market environment. High levels of excess spread generally lead to attractive returns for equity holders, while at the same time providing downside protection potential for the debt investors.
Exhibit 1: CLO Equity Arb
Annual Asset Loss
2.50%
Avg Spread on Liabilities
AA: Base Rate + 2.50% A: Base Rate +3.25% BBB: Base Rate + 4.75% BB: Base Rate + 8.00%
1.20%
Equity
Excess Spread for Equity
Assets
Liabilities
Exhibit 3: CLO Issuance vs. Equity Arb Equity Arb (Loan Spread - Liability Cost) Asset Spread 60bn
400 350 300
bps
250 200 150 100 50 0
0
12
20
1/
0 3/
0
13
20
1/
0 3/
0
14
20
1/
0 3/
0
15
20
1/
0 3/
0
16
20
1/
0 3/
0
17
20
1/
0 3/
0
18
20
1/
0 3/
0
19
20
1/
0 3/
0
20
20
1/
0 3/
0
21
20
1/
0 3/
22
20
1/
/0 03
23
20
1/
/0
03
As seen in Exhibit 1, over the last 10+years, the CLO arbitrage has moved depending on the market environment. As it is a key metric in deciding when it is attractive to issue a CLO, the movement in the Arb has directly influenced the pace and magnitude of CLO issuance.
CLO Issuance (LHS)
300
Equity Arb (RHS)
50bn
250
40bn
200
30bn
150
20bn
100
10bn
50
0bn
-
bps
Liability Cost
450
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023
500
CLO Arbitrage Benefited from Libor Floors
Energy sector drove loan prices down, along with higher liability stacks
Liabilities reach their tightest point, causing issuance volumes to increase
COVID-19 caused loan prices and issuance volumes to fall off
Post-Covid issuance took off once liabilities stabilised
AAAs widen, hurting the equity arb and primary issuance
2013 - 2015
2016
2017 - 2018
2020
2021
2022
14 | The CLOser
CLO equity is sought after for its very high dividend yield, generally high teens / low 20s per annum. And while the Arb at time of issuance generally determines what this yield will be, it isn’t always a great representation of what the ultimate total return to the equity investors will be. There are a few other factors that can influence the ultimate outcome. Price of Assets: The greater the price discount on the loans, the more upside the CLO has from a rally in loan prices. The CLOs issued in 2020 and 2022 had relatively poor Arb at issuance but as loans were very discounted when these deals were issued, these deals benefited from a rallying market afterwards which boosted the value of the collateral within these CLOs. This value can be extracted by either redeeming the CLO or by refinancing the capital structure. Refinancing Optionality: When we talk about Arb, we are essentially talking about the combination of liability costs and asset spreads. CLOs typically have a non-call period that ranges from 1-2 years. One half of the Arb, the liability costs, can be changed after the non-call period of the CLO expires. So, the Arb doesn't stay static within the life of a CLO and issuing when liability costs are abnormally wide can still result in good returns as the CLO can benefit from a refinancing further down the road. This was another reason 2020 vintage CLO equity performed very well. With liability costs having come in substantially in 2021, most of the 2020 deals were able to refinance and reduce their cost of debt. During 2021, 525 deals totaling over US$230 billon in size were either refinanced or reset.
Manager Tiering & Performance: Finally, manager tiering and manager performance have a big impact on CLO equity returns and the Arb isn’t a one-size-fits-all approach. As CLOs are reinvesting vehicles and we now have more than a decade of manager performance data, there exists a pretty dramatic tiering in the market. As an example, we plot the different AAA prints in the market in 2023 YTD. Exhibit 5: 2023 New Issue AAA Prints 350 330 310
AAA Spread
Different Ways to Think About the Arb
290 270 250 230 210 190 170 150 January-23
February-23
March-23
April-23
May-23
June-23
August-23
As shown above, there is quite a bit of dispersion in the market and depending on the manager, the Arb can look great or very poor. Manager tiering is largely a function of performance and scale, and because of this, there is a positive feedback loop mechanism in the market for larger and better CLO managers – they are able to issue deals with better Arb because of their performance and that in turn leads them to issue more deals with better Arb which drives better performance. Exhibit 6: Manager Performance/Tiering Impact
Exhibit 4: Principal/Refi Upside Arb 3yr Loan DM - Liability Spread
600
Lower Tier Manager
600
Potential Reset Upside from tightened liabilities
500 450 400
550 500 450 400
350
350
300
300
250
250
200
200 150
150
100
100 12
0 1/2
/0
Lower Performing Manager
Higher Performing Manager Higher Tier Manager
550
03
3yr Loan DM - Liability Spread
13
03
/0
0 1/2
14
03
/0
0 1/2
/0
03
17
16
15
0 1/2
03
/0
0 1/2
03
/0
0 1/2
19
18
03
/0
0 1/2
03
/0
0 1/2
1/
/0
03
21
0
2 20
03
/0
0 1/2
1/
/0
03
2
2 20
1/
/0
03
3
2 20
0
7
1 20 1/
0 3/
8
1 20 1/
0
0 3/
0
2 20 1/
0
0 3/
22 20 1/
1
0
9
1 20 1/
0 3/
2 20 1/
0
0 3/
0
0 3/
3
2 20 1/
0
0 3/
October 2023 | 15
Arb Determines Magnitude of Issuance but Poor Predictor of Ultimate Returns Manager performance, asset environment, refinancing optionality are a few key variables that the point-in-time Arb statistic can’t capture but ultimately prove to have a pretty meaningful impact on CLO equity returns. In fact, in our analysis, vintage diversification has proven itself to be an important and essential component of a CLO equity investing strategy.
400bn
CLO Primary Issuance be (LHS)
350bn
Equity IRR
100%
75%
300bn 50%
250bn
25%
200bn 150bn
Equity IRR
US Primary Issuance
Exhibit 7: CLO Issuance & Equity IRRs by Vintage
0%
100bn -25%
50bn 0bn
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
-50%
Finally, our analysis shows that while asset spreads and liability costs are both equally important in determining the Arb, CLO equity returns are generally highest when the asset side of the equation is more attractive. This is why we see an inverse correlation between equity returns and large CLO issuance years. In years when CLO issuance is very strong, assets have been bid up and are very expensive and has negatively impacted performance of those structures over time. Exhibit 8: Equity IRRs by Vintage Bottom Quartile IRR
25%
Top Quartile IRR
Median IRR
180bn 160bn 140bn
15%
120bn 100bn
10%
80bn 5%
-5%
Stephanie Walsh
Partner - Head of US CLOs +1 (617) 516-2805 swalsh@baincapital.com
Lakshya Madhok
Managing Director - Head of CLO Investing +1 (617) 516-2195 lmadhok@baincapital.com
David Schiffmann
Managing Director - Head of Structuring +1 (212) 326-9660 dschiffmann@baincapital.com
200bn
CLO Primary Issuance (RHS)
20%
0%
For further details, please contact:
Seth Bancroft
Director - Investor Relations +1 (774) 218-8319 sbancroft@baincapital.com
60bn 40bn 2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
20bn 0bn
Jeff Garver
Vice President - CLO Investing +1 (617) 516-2228 jgarver@baincapital.com
Your Global CLO Team – A CLOser Look James Reeve
Partner | Legal Services | Cayman Islands +1 345 814 4467 james.reeve@maples.com
For those looking for a more 'in-depth' story, please refer to my Q&A in our February 2019 edition of The CLOser . What did you do before working at the Maples Group? Prior to joining the Maples Group in 2011, I worked in London at Slaughter and May. Peering back even further into the past, before entering the legal profession in 2004, I was a doctoral student in physical chemistry at the University of Oxford. I won't go into any detail as it is unlikely to mean much to most of you, but I basically played with neutrons and fairy liquid; the aim of my research was to formulate a way of modelling how the key chemicals in detergents interact with each other and their environment. Supported by a generous grant from the UK Engineering and Physical Sciences Research Council, I had the opportunity and privilege to perform all my experiments at synchrotron facilities and nuclear reactors in the UK and France. Alongside my doctoral studies, I somehow managed to hold down a number of (rather entertaining) part-time jobs and, eventually, studied part-time for a post-graduate degree in law while writing my thesis. How I survived all that I can't quite recall, but hard work, perseverance and encouraging support from persons near and dear were key – and they remain fundamental to me as I continue to navigate through life's opportunities and challenges.
Do you have any skills or talents that most people don't know about? Over the years, I've pursued a variety of different hobbies and pastimes with varying degrees of success. The most longstanding of these being my love of music and playing the piano, but more recently, yoga. In fact, I am particularly adept at headstands, handstands and generally being upside down – plus have a remarkable talent for putting my foot in my mouth, although that's unrelated and for another time...
Relevant to my interest in science, many (many) years ago I won a nationwide competition to design a chemistry set for kids and was featured in the local newspaper…and many (many) years later I won a Kodak photography competition. While not one for being the centre of attention, I am undeniably partial to a little competition from time to time!
If you could add a word to the dictionary, what would you add and what would it mean? This is a very personal one, but it would be 'to Leonise' or, in US English, 'to Leonize'. My husband, Leo, is a barrister and mediator and studied for his doctorate degree in law at Oxford at the same time as I studied physical chemistry. During our postgraduate years, he became notorious for his powers of persuasion and negotiation such that his close friends and acquaintances coined this word to describe succinctly his uncanny ability to achieve a certain outcome or to bring one around to a particular idea or way of thinking. Somewhat annoyingly he is invariably right though and – to this day, over 20 years later – old friends and alumni will fondly recall and re-use the word. So, in honour and respect of my better-half – who has had a profound impact in the field of human rights in the Caribbean in part through utilisation of this specific skill – I would add the word "to Leonise".
Tell us three fun facts about yourself. I once designed (and constructed) an automatic rabbit feeder to give people comfort that their furry little carrot-munching companions will never go hungry. If you place me in a building in New York and then release me on to the streets without supervision, or a map (rotated to the correct direction of travel), I will get lost. I'm terrified of clowns.
James Reeve
Partner | Legal Services
18 | The CLOser
Sheraim Mascal
Vice President | Cayman Islands
October 2023 | 19
Sheraim Mascal
Vice President, Cayman Islands (currently seconded to Jersey) +44 1534 495 366 sheraim.mascal@maples.com
I am a Vice President in the Maples Group’s Jersey office, providing fiduciary services to a wide range of structured finance products, including CLOs and asset finance. What did you do before working at the Maples Group?
Do you have any skills or talents that most people don't know about?
I’m originally from the Cayman Islands and straight out of high school I began working as a teller with a local bank before commencing my associate degree. In addition to on-the-job skills, I learned how to develop patience in this role, as well as the importance of good customer service and the impact it could make on someone's day.
From just a couple of bites, I can usually tell the exact ingredients in any dish. I used to love cooking and baking, often spending my weekends testing out new recipes, but these days I'm lucky if I have time to make breakfast. Although, I am quite handy at getting takeout and making dinner reservations.
I also spent some time working as a concierge at the Hyatt Regency, where I made some of my best friendships. It's fair to say that this is where my passion as a "foodie" began, particularly as all the best local restaurants started to treat me like royalty in the hope that I would recommend them to my guests. With over 140 different nationalities in the Cayman Islands and a focus on fresh local produce and creativity, it is no surprise it is known as "the culinary capital of the Caribbean". After completing my bachelor's degree at Florida International University, I worked in fund administration for a couple years before embarking on my current journey in the world of structured finance and capital markets.
If you could transport yourself anywhere right now where would you go, with whom and why?
What do you like to do in your spare time? Just over a year ago, the opportunity came up for me to transfer to our Jersey office and work with the CLO / Structured Finance team. I relocated to Jersey in July 2023 and have been settling in nicely, although I am still getting used to the changing weather. I've been told that this year has been the worst summer for a long while, so I have big expectations for next year! I have been exploring the beautiful coastlines around the island on the weekends and by the time my visitors arrive I should be well prepared with an exciting itinerary. I do however miss my F45 classes, and although I haven't yet found anything that gives me the same adrenaline rush, I have been enjoying the weekly bootcamp sessions with my colleagues.
Travel is always on my mind. I have visited 30 countries and I’d love to see many more. For my next trip, I'm torn between completely disconnecting in Tenerife, or going on a group expedition somewhere like Egypt or Jordan, which have both been on my bucket list for years. I'm leaning towards something more laid back so Tenerife might win out this time.
Tell two fun facts about yourself. I have put together most of my furniture by myself. I actually find this to be a very therapeutic exercise, however I'm not especially confident using a drill and I think the fear of seriously injuring myself means I may never fully develop this skill. I am also a wine enthusiast and in 2022, I obtained my WSET Level 2 certification (Wine & Spirit Education Trust). To continue building on my wine knowledge and confidence, I plan to sit for Level 3 when I get the opportunity.
A Global Team Our CLO team comprises 33 specialist CLO lawyers and 58 specialist CLO fiduciary professionals across our global network. Since the inception of the CLO market over 20 years ago, we have provided our clients with the benefit of our unparalleled depth of knowledge, experience and insight into what we see across the whole structured finance market, from the latest warehousing structures, to the latest regulatory developments and how they impact CLOs, to ongoing post-closing CLO issues.
For further information, please speak with your usual Maples Group contact, or the following primary CLO contacts:
90
+
GLOBAL CLO PROFESSIONALS
Legal Services Cayman Islands Scott Macdonald +1 345 814 5317 scott.macdonald@maples.com James Reeve +1 345 814 5129 james.reeve@maples.com John Dykstra +1 345 814 5530 john.dykstra@maples.com Tina Meigh +1 345 814 5242 tina.meigh@maples.com Jonathon Meloy +1 345 814 5412 jonathon.meloy@maples.com
Fiduciary Services Andrew Quinn +353 1 619 2038 andrew.quinn@maples.com William Fogarty +353 1 619 2730 william.fogarty@maples.com Lynn Cramer +353 1 619 2066 lynn.cramer@maples.com Hong Kong / Singapore Michael Gagie +65 6922 8402 michael.gagie@maples.com Jersey
Anthony Philp +1 345 814 5547 anthony.philp@maples.com
Paul Burton +44 1534 671 312 paul.burton@maples.com
Amanda Lazier +1 345 814 5570 amanda.lazier@maples.com
London
Dublin Stephen McLoughlin +353 1 619 2736 stephen.mcloughlin@maples.com Callaghan Kennedy +353 1 619 2716 callaghan.kennedy@maples.com
Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com Luxembourg Arnaud Arrecgros +352 28 55 12 41 arnaud.arrecgros@maples.com
Cayman Islands Guy Major +1 345 814 5818 guy.major@maples.com Delaware James Lawler +1 302 340 9985 james.lawler@maples.com Dublin Stephen O’Donnell +353 1 697 3244 stephen.odonnell@maples.com Jersey Robert Lucas +44 1534 671 371 robert.lucas@maples.com London Sam Ellis +44 20 7466 1645 sam.ellis@maples.com Netherlands Allard Elema +31 203 998 233 allard.elema@maples.com
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