Poh-Heng Tan from CLO Research shares insights on strong cover bids and diverging IRRs highlighting CLO equity market dynamics amid leverage and post-RP trends

Source: Intex, CLO Research, SCI

ACLO 9X SUB received a strong cover bid of 74.27, according to SCI’s BWIC data. With an annual distribution of 24.7% since inception, this translated into a robust 22.3% IRR for primary equity investors, assuming an issue price of 95. For secondary investors, however, such a price would likely imply a low- to mid-teens IRR under generous assumptions—suggesting the level is rich, particularly given the deal’s high leverage.

The deal’s estimated initial arbitrage stood at around 225 bps (portfolio discounted spread less cost of funding based on DM). Its strong distribution was partly driven by an outsized first payment of 18.2 points and a highly leveraged structure—nearing 14x collateral-to-equity notional—well above the sub-12x average for H1 2022 deals.

BBAME 3X SUB, another 2022 vintage tranche, received a similar cover bid in the 70s, though its primary equity IRR was lower at 13.3%, due to more modest annual distributions.

CORDA 16X M1 and ANCHE 4X SUB have both exited their reinvestment periods. CORDA 16X M1’s cover bid was roughly clean equity NAV plus one payment; ANCHE 4X SUB’s was about two payments above clean NAV. With IRRs between 6.1% and 7.2%, both rank in the fourth quartile relative to similarly aged tranches traded since July 2024.

Another deal that has exited its reinvestment period, MDPKE 14X SUB (2019 vintage), also received a cover bid in the 50s—less than one distribution above its clean equity NAV of around 50—yet delivered a primary equity IRR well above that of its peers. Distributions remain strong, with the latest at approximately 5.6 points. The manager’s post-RP prepayment track record makes the tranche appealing to secondary buyers.

ACLO 7X SUB, another Spire-managed tranche, also delivered strong results. It received a cover bid of 68.56 and achieved a 21.5% annual distribution, translating to an 18.0% IRR for primary investors.

DRYD 2017-59X SUB was bid at 28.2, reflecting a low clean equity NAV of around 24. The deal exited reinvestment roughly 2.5 years ago, and its most recent equity payment dropped to 3.5 points. Despite the modest exit, its IRR for primary investors reached 15.6%, supported by seven years of distributions averaging 19.1%.