Poh-Heng Tan from CLO Research provides insights on US CLO double-Bs and distressed single-B bonds

Recent BWIC activity highlights growing stress in the lower-rated CLO tranche space, with single-B bonds covering as low as 10h amid collapsing NAVs and uncertain recovery prospects, while double-B tranches show wide dispersion driven by credit quality, ratings, and duration risk.

According to SCI’s BWIC data, yesterday’s BWIC colour included three distressed bonds originally rated single-B: two were covered at 31h, and one at around 10h. Discount margins were not reported, as it is highly unlikely these bonds will be repaid at par—an IRR-based approach would be more appropriate. Pricing these thin tranches remains particularly challenging, as even a small change in the underlying collateral NAV can significantly affect their value. Given the negative equity NAV of these deals, repayment of the single-B tranche will rely on collateral amortisation, along with the eventual realisation of the remaining distressed assets at market value. In fact, these bonds are not alone, as many of their peers from the same vintage are also showing an MVOC (single-B) below par.

Looking at double-B bonds, PSTAT 2022-4A DR traded with a cover of 524DM, supported by its top-tier MVOC. The next tightest double-B bond was ARES 2017-45A ER, which covered at 548DM, also benefiting from a strong MVOC. Although BLUEM 2013-2A ER has a higher MVOC than CIFC 2013-4A ER2, it traded wider—likely due to its current B+ rating and duration risk, compounded by its negative equity NAV, among other factors. Several of these bonds’ peers with similar reinvestment period end dates have already been fully liquidated, having experienced much faster post-RP prepayment rates in the first year following the reinvestment period.