Poh-Heng Tan from CLO Research provides insights on recent secondary trading

In the evolving world of European CLOs, secondary market dynamics offer a telling glimpse into investor sentiment and relative value. Recently, trading activity in double-B and equity tranches has revealed notable pricing trends and performance disparities.

For instance, based on SCI BWIC data, CRNCL 2018-10X E (Cairn CLO X) traded at noticeably tighter DM levels (based on cover prices) than BCCE 2018-2X E (Bain Capital Euro CLO 2018-2), despite having slower post-reinvestment period (post-RP) annual prepayment rates and a slightly lower MVOC.

But what drove this divergence? Was it market perception of manager quality, structural resilience, or simply a flight to stability? By analysing recent BWIC (bids wanted in competition) data from SCI, we uncover the nuanced factors influencing tranche-level pricing and explore the performance attribution of three key EU CLO equity tranches.

One possible explanation is that BCCE 2018-2X E failed its Class F OC test in January 2025, triggering a diversion of interest cashflows to pay down the Class A notes — a structurally sound, self-correcting mechanism, though less attractive from a cosmetic standpoint. In addition, its equity NAV — currently in the teens — is markedly lower than that of CRNCL 2018-10X E, which stands in the 40s. Should market conditions worsen and equity NAV move into negative territory, BCCE 2018-2X E’s duration could be extended.

CORDA 12X E (CVC Cordatus Loan Fund XII), on the other hand, has a solid MVOC, but recorded single-digit prepayment rates in both the first and second years post-RP. Its near-par price may also have limited the bond from trading tighter. Turning to four double-B tranches with one to two years remaining in their reinvestment periods — three of them traded above par.

While ELMP 1X DRR (Elm Park CLO) exhibited the widest discount margin to maturity among the three above-par bonds, its DM to call is likely to be much tighter, given it traded well above par. With a current WACC of 1.65% — lower than recent reset WACCs of around 1.90–1.95% — a future reset could still prove economical.

DRYD 2016-46X ER (Dryden 46 Euro CLO 2016), on the other hand, traded at the widest DM among the four bonds, largely due to its lower MVOC.

Looking at three long-dated double-B tranches with reinvestment end dates in 2029:

AVOCA 31A E (Avoca CLO XXXI) stood out with an impressive discount margin to maturity of 586, despite having a similar MVOC to the other two tranches. This is perhaps unsurprising, as KKR is a large manager with an above-average MVOC profile across its platform. Both CLNKP 2024-1A E (Clonkeen Park CLO) and ARBR 13A E (Arbour CLO XIII) traded at comparable levels, with discount margins of around 612–613.

Performance Attribution of Three EU CLO Equity Tranches on a Recent BWIC

The primary equity IRRs presented in the table below reflect the returns that primary investors would have achieved, assuming an issue price of €95.

Cairn CLO X traded on 12 March 2025 with a released cover price of EUR 46.3, equating to a primary equity IRR of 13.7%.

At 13.7%, this 2018-vintage deal would rank in the top 10% among other 2018-vintage EU CLO equity tranches with BWIC colour released since July 2024. Notably, this deal experienced post-reinvestment period (post-RP) annualised prepayment rates of 0% in the first year and 14.1% in the second year. Its strong performance was largely driven by a solid annual distribution of over 18% sustained over more than six years.

Turning to another 2018-vintage deal, Harvest CLO XX, this deal was not traded via BWIC on 13 March 2025. However, based on the disclosed price colour, its equity tranche recorded a primary equity IRR of 10.8%, based on a price of EUR 50.1. While this equity tranche attracted a higher bid than Cairn CLO X, its primary equity IRR is lower due to its lower annual distribution. At an IRR of 10.8%, this deal would fall within the 25th to 50th percentile range. In terms of post-RP prepayment rates, it recorded 3.6% in the first year and 13.8% in the second year post-RP.

Finally, Ares European CLO VIII, a 2016-vintage deal, also did not trade via BWIC on 13 March 2025. Based on the disclosed price colour, its equity tranche achieved a primary equity IRR of 6.1%.

Given the limited number of 2016-vintage deals traded via BWIC since July 2024, its performance is compared to the equity IRRs of redeemed deals from the same vintage. At 6.1%, it would be positioned in the 25th to 50th percentile range.

Despite benefiting from a longer runway due to a 2019 reset, which extended its reinvestment end date from 17 February 2021 to 17 April 2024, its low IRR was largely attributed to its below-average annual distribution of 11.3%, relative to redeemed deals from the same vintage.

Source: SCI, Intex, CLO Research, S&P Global Market Intelligence