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Global credit funds & CLO's
September 2020 | Issue 227
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News
Banks tighten asset approval terms for CLO warehouses
September 2020 | Issue 227
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Michelle D’souza
Reporter
Managers have raised concerns over tighter, lender-friendly terms in new-look US CLO warehouses as banks gradually reopen these lending facilities. Asset approval warehouses in particular have come under scrutiny, says Christopher Duerden, partner at Dechert.
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Under such warehouses, lenders typically approve assets at the time of a CLO manager’s commitment to those trades. However, some warehouses now require assets to be approved twice. This could be in terms of concentration limits or other portfolio tests.
“Banks are concerned about the pace of downgrades,” Charlotte-based Duerden says. “A lot can happen in a volatile market between the commitment date and the settlement date, and banks don’t want to get stuck with a whole bunch of triple C-rated assets, or worse, even though they weren’t at the time of commitment.”
In extreme cases, provisions even allude to banks being able to back out of warehouses altogether, or removing approval of assets they had previously approved, says Duerden.
“At some level, depending on how many safeguards banks are putting into their warehouse docs, managers need to step back and ask if it’s even a committed warehouse.”
“Managers need to step back and ask if it’s a committed warehouse”
Christopher Duerden, Partner | Dechert
It is easy to see why some CLO managers have concerns: if a manager enters a loan on a trade date and the loan has checked all the boxes, the notion that it could fall apart right before settlement is worrying.

Some CLO managers, however, have started to push back and ask for some protection, Duerden says. He adds it is typically phrased along the lines of “if the bank rejects a certain number of approval requests, and they otherwise would have been eligible, the CLO manager wants the ability to terminate the facility with no prepayment, etc”.

According to US Bank’s July US CLO warehouse report, 62 warehouses were open in July compared to 72 in March. About a third of the warehouses have been open for more than nine months, with just five warehouses opening in July.

Although deal terms are tight, there is some good news. One European CLO manager says: “If you can get a warehouse open it’s great. There are terms that this time last year a CLO manager would not have accepted. But now you might because it’s better to move forward.”
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CLO Symposium 2020
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