By the Numbers

Rising stars, falling angels and going concerns among CLO managers

and | December 1, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Beyond the usual questions about manager investment performance, the trajectory of a manager platform matters as well. Investors want to know that assets under management will continue to support the management team and the liquidity of the debt. With 35% of outstanding CLOs in repayment by the start of 2024, attention to platform has sharpened. It helps to broadly categorize platforms as rising stars, falling angels and going concerns. The categories highlight the share of managers that may survive in coming years, and those that may not.

The going concerns

Of the 86 different managers of active CLO deals, 55 have CLO assets under management of more than $5 billion and 31 have less than $5 billion. That amount of AUM seems a reasonable threshold for tagging a platform as a successfully established going concern. That level of AUM arguably supports a solid team of underwriters, traders, portfolio managers and other critical infrastructure. CLO managers embedded in insurers, asset managers or other organizations, of course, may have a lower AUM but still be able to draw on substantial resources beyond those committed solely to CLOs. But $5 billion of CLO AUM can start to filter going concerns from businesses in transition.

The rising stars and falling angels

To see if businesses under $5 billion in AUM look like rising stars with lots of reinvestment runway or falling angels vulnerable to runoff, it helps to look at their projected AUM over coming years. For CLO managers backed by sufficient equity and willing to continue issuing new deals, a sizable share of the AUM will always be in its reinvestment period. Repayments for these rising stars should have limited impact on platform AUM since a significant share will get reinvested. And stable AUM gives a platform its best chance to continuing pursuing growth above $5 billion. For managers unable or unwilling to issue regularly, a rising share of AUM will start repayment, leaving these falling angels vulnerable to steady decline.

One way to size the population of rising stars, falling angels and going concerns is to use a standard assumption of 20 CPR, 2 CDR and 70% recovery on a portfolio of leveraged loans and then project cash flows for every active deal on a manager platform. Platforms with deals largely in reinvestment will show a limited decline in AUM. In the extreme cases of all deals in reinvestment, AUM will not decline at all. Platforms with deals in repayment will show decline. In the extreme case of all deals in repayment, AUM at 20 CPR and 2 CDR will decline over three years to around 47% of the current balance. In any particular CLO, loan maturities can drive AUM down even faster. Of course, this assumes no new deals get issued and none get reset. It also ignores provisions in some deals that allow substantial reinvestment even after the reinvestment period ends. And it also ignores possible material differences in the rate of repayment across managers. Nevertheless, considering absolute projected platform AUM at 1-, 2- and 3-year horizons and projected AUM as a share of today’s balance begins to paint the picture of the market mix.

The mix a year from now

A year from now, assuming standard repayment, default, and recovery assumptions, of the 86 active managers 35 have AUM of less than $5 billion (Exhibit 1A). If we use the average 1-year decline of AUM to 88.4% of the original to separate rising stars from falling angels, then 17 of the smaller managers are rising stars and 18 are falling angels.

Exhibit 1A: Eighteen smaller managers may see AUM decline faster than the peer average

Notes: The data set includes 1,848 BSL CLOs from 86 managers with 5 or more outstanding BSL CLOs as of November 30, 2023. The aggregated current AUM of the 86 managers, as indicated by the outstanding par collateral balance, is $803 billion. By December 30, 2024, the projected AUM is $709 billion based on 20% CPR, 2% CDR, 70% recovery, a 6-month recovery lag for defaulted assets, and 50% recovery for defaulted assets.  Additionally, the weighted average projected AUM of 86 managers is 88.4% of the current aggregated AUM by 2024 year-end.  Falling angels are shown by red dots, which include 18 managers with a projected AUM of less than $5 billion and less than 88.4% of the current AUM by December 30, 2024.
Source: INTEX, Santander US Capital Markets LLC

At the 1-year horizon, rising stars hold 6.9% of the current outstanding AUM, falling angels hold 7.6%, and going concerns hold 85.5% (Exhibit 1B).

Exhibit 1B: Falling angels represent less than 10% of the current $803 Bn outstanding AUM

Notes: 17 rising stars, with projected 2024 year-end AUM of less than $5 billion and no less than 88.4% of current outstanding AUM, have a total AUM of $55.4 billion as of November 30, 2023.  Failing angels, comprising 18 managers with a projected 2024 year-end AUM of less than $5 billion and less than 88.4% of current outstanding AUM, have a total CLO AUM of $61.2 billion as of November 30, 2023. The remaining 51 going concern managers all have projected AUM of no less than $5 billion by the end of 2024.
Source: INTEX, Santander US Capital Markets LLC

The mix two years from now

Two years from now, of the 86 active managers, 41 have an AUM of less than $5 billion (Exhibit 2A). By the end of 2025, average CLO AUM declines to 77.5% of the current balance.  Using that percentage as a threshold to separate rising stars from falling angels, 19 of the smaller managers are rising stars and 22 are falling angels.

Exhibit 2A: An increasing number of smaller managers’ AUM may drop faster than the peer average in a two-year horizon

Notes: The data set includes 1,848 BSL CLOs from 86 managers with 5 or more outstanding BSL CLOs as of November 30, 2023. The aggregated current AUM of the 86 managers, as indicated by the outstanding par collateral balance, is $803 billion. By December 30, 2025, the projected AUM is $617 billion based on 20% CPR, 2% CDR, 70% recovery, a 6-month recovery lag for defaulted assets, and 50% recovery for defaulted assets.  Additionally, the weighted average projected AUM of 86 managers is 77.5% of the current aggregated AUM by 2025 year-end.  Falling angels are shown by red dots, which include 22 managers with a projected AUM of less than $5 billion and less than 77.5% of the current AUM by December 30, 2025.
Source: INTEX, Santander US Capital Markets LLC

At a two-year horizon, rising stars control 8.7% of projected market AUM and falling angels control 10.3% while going concerns control 81% (Exhibit 2B).

Exhibit 2B: Falling angels reach 10% of the current $803 Bn AUM by the end of 2025

Notes: 19 rising stars, with projected 2025 year-end AUM of less than $5 billion and no less than 77.5% of current outstanding AUM, have a total AUM of $69.8 billion as of November 30, 2023.  Failing angels, comprising 22 managers with a projected 2025 year-end AUM of less than $5 billion and less than 77.5% of current outstanding AUM, have a total AUM of $82.5 billion as of November 30, 2023. The remaining 45 going concern managers all have projected AUM of no less than $5 billion by the end of 2025.
Source: INTEX, Santander US Capital Markets LLC

The mix three years from now

Three years from now, of the 86 managers now active, 46 have AUM of less than $5 billion (Exhibit 3A). The average manager’s AUM drops to 65.5% of the current balance.  Using 65.5% as a threshold to separate rising stars from falling angels, 21 of the smaller managers are rising stars and 25 are falling angels.

Exhibit 3A: More than half of the 86 managers expect AUM to fall below $5 Bn by 2026

Notes: The data set includes 1,848 BSL CLOs from 86 managers with 5 or more outstanding BSL CLOs as of November 30, 2023. The aggregated current AUM of the 86 managers, as indicated by the outstanding par collateral balance, is $803 billion. By December 30, 2026, the projected AUM is $516 billion based on 20% CPR, 2% CDR, 70% recovery, a 6-month recovery lag for defaulted assets, and 50% recovery for defaulted assets.  Additionally, the weighted average projected AUM of 86 managers is 65.5% of the current aggregated AUM by 2026 year-end.  Falling angels are shown by red dots, which include 25 managers with a projected AUM of less than $5 billion and less than 65.5% of the current AUM by December 30, 2026.
Source: INTEX, Santander US Capital Markets LLC

By 2026, the share of rising stars and falling angels, measured by their current AUM, continue to rise, with falling angels reaching 12% (Exhibit 3B).

Exhibit 3B: Falling angels expect to rise above 10% in three-year horizon

Notes: 21 rising stars, with projected 2026 year-end AUM of less than $5 billion and no less than 65.5% of current outstanding AUM, have a total AUM of $86.4 billion as of November 30, 2023.  Failing angels, comprising 25 managers with a projected 2026 year-end AUM of less than $5 billion and less than 65.5% of current outstanding AUM, have a total AUM of $98.3 billion as of November 30, 2023. The remaining 40 going concern managers all have projected AUM of no less than $5 billion by the end of 2026.
Source: INTEX, Santander US Capital Markets LLC

The implications of holding rising stars, falling angels and going concerns

Investors would probably do well to see whether their holdings include the debt of rising stars, falling angels or going concerns. The debt of rising stars stands a good chance of benefiting from actual or perceived improvements in liquidity as the platform continues to issue. The debt of falling angels could get caught by an actual or perceived decline in liquidity as AUM thins out. For going concerns, it should be largely business as usual.

As for the managers, falling angels may highlight the role of repeat issuance in building a platform. Even if current projected return on equity does not meet equity investor standards, issuance preserves platform options to issue at a later date when either loan spreads, debt spreads or both offer better potential equity returns. In 2024, issuance for the sake of survival may become more common.

An earlier version of this article included errors in calculating managers with less than $5B AUM as a percentage of total active managers. Those percentages have been removed.

Steven Abrahams
steven.abrahams@santander.us
1 (646) 776-7864

Caroline Chen
caroline.chen@santander.us
1 (646) 776-7809

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