September 30, 2024 - The NAIC today held an ad hoc call with its Structured Securities Group to provide an update on its CLO workstream, following the release earlier this month of preliminary modeling results for BSL CLOs based on 10 proposed default and recovery scenarios across about 13,500 CUSIPs and 1,900 deals. While the NAIC did not propose specific probability weights for each scenario, they did suggest maximum probabilities on certain severe stress scenarios.
On the call, NAIC Structured Securities and Capital Markets Director Eric Kolchinsky highlighted research reports from Bank of America and Nomura that assign theoretical risk-based capital (RBC) charges across BSL CLO tranches using estimated probabilities across the scenarios.
Under BofA’s estimates, AAA and AA tranches are mostly treated as zero loss, A tranches receive more favorable NAIC ratings designations, BBBs are mixed (50% more favorable and 37% less favorable) and BB tranches receive worse designations. BofA sees the effective RBC of the entire CLO pool at approximately 6%, compared to 3.8% currently.
According to Nomura, IG tranches would see modest to marginal increases in RBC and, like BofA’s analysis, BB and lower rated tranches would see significant increases in RBC charges.
Although the NAIC did not participate in the research, Kolchinsky said that he agrees with the reports’ conclusions that AAA tranches will be hard to stress. Kolchinsky noted further that the NAIC has received feedback on the modeling results, namely a request for CUSIPs for the tranches that were modeled and current designations for the tranches versus the modeled designations. Kolchinsky indicated that the NAIC is not authorized to redistribute CUSIPs but that he would work on identifying the correct tranches.
Additionally, Kolchinsky indicated that one set of probabilities will apply to all BSL CLOs. Moreover, if the recently adopted 45% RBC charge for insurance companies for securitization residual tranches is ultimately deemed too low (the American Academy of Actuaries is still finalizing its recommendation for a long-term solution), the additional RBC won’t migrate to more senior tranches, rather the residual tranche RBC would be adjusted.
Kolchinsky expects the scenario probabilities to be published by the next NAIC National Meeting, which is scheduled for November 16-19, 2024, followed by an industry comment period. The NAIC plans to hold CLO ad hoc calls monthly starting in January 2025.
