Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2024. All rights reserved. Available by subscription only.
News
CLO managers deploy big guns in battle to get on ad hoc committees
by Paul Conley
As lender-on-lender violence increases, CLO managers are being forced to dedicate staff time to protecting their interests when a loan looks to be troubled.
Employees have been tasked with calling lawyers and other investors to find out which companies are considering a liability management exercise (LME) and which creditors are looking to form ad hoc committees.
“You’ve got to call around and get yourself on the committee,” one market insider said. “When you’re just one of 80 or 100 investors on a loan, it’s too easy to be left out.”
These staffers — often senior team members who already have substantial duties — “make sure we are aware of everything going on with credits that are exhibiting some amount of stress and ensure we are given every opportunity to be included in ad hoc groups and participate in restructuring activities”, said one manager.
CLO managers which have tasked members of their investment teams with managing and monitoring potential restructurings and ad hoc committee formations include Investcorp, Bain Capital, Octagon Credit Investors and Invesco.
The reason is clear. LMEs are the most common way for a troubled company to avoid bankruptcy. But LMEs have become notorious for allowing the largest lenders to push for deals that favour them at the expense of smaller creditors — a situation known as “creditor-on-creditor violence”. That’s led to the use of co-op agreements by ad hoc lender groups that aim to create a majority position in one or more tranches of a debtor’s capital structure.
In May, concerns about being excluded reached fever pitch when more than 40 iHeartMedia creditors were involved in a flurry of conference calls. Legal advisors rushed to form ad hoc groups amid fears the media company could consider an LME, four sources familiar with the matter told Debtwire at the time.
That frenzy led to what one market insider calls LME 2.0, in which debt holders such as CLOs dedicate resources to learning as early as possible which loans are in trouble, and which other creditors would make valuable ad hoc committee allies.
For the largest CLO managers this job is less onerous. Shops on the scale of Carlyle or Blackstone generally have large enough positions in any name to be the core of any ad hoc lender group.
But for small CLO managers, even dedicating staff to work the phones doesn’t ensure a seat on an ad hoc committee. That’s why perhaps the most important function of these employees is to recognise when it’s time to sell a loan. One CLO manager said: “If you can’t get on an ad hoc committee, it’s better to punch out.”
