Global credit funds & CLO's
September 2020 | Issue 227
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September 2020 | Issue 227
Covid-19 pandemic draws CLO repricing from out of shadows
Hugh Minch
A rare CLO repricing took place last month, despite the option being written into CLO documentation for years. Repricings differ from traditional CLO refis, in which bonds are called and new debt is issued. A repricing clips the coupon on the bond without calling it.
The first repricing is believed to have taken place in June 2015 when Goldman Sachs reworked double A notes in GSO Capital Partners’ Emerson Park CLO. But the process is rarely used, with the refinancing format being more established.
Firms across the CLO market, from arrangers to managers and law firms, are reducing fees to keep up deal flow amid the covid-19 pandemic. An advantage of repricing a CLO over refinancing it is the issuer can avoid paying a rating agency a fee for a new rating, as the documentation of the CLO remains unchanged.
In August, Jefferies repriced two CLOs managed by MJX Asset Management: Venture 28 and Venture 28A. Jason Schechter, Jefferies’ global head of CLO trading and origination, says he approaches deals as if selling a platform, rather than a transaction, and began the repricing process by convincing service providers to adopt a similar approach.
“We needed all providers to agree to a reduced expense load, such that the CLOs could benefit from the reduced liability levels,” Schechter says. “If done properly these platforms should grow, and additional deals with higher fees could be done later.”
The trend comes as managers rush to cut funding costs on their fixed-rate liabilities. Last month Libor dropped below 25 basis points for the first time since 2014, lowering the attractiveness of floating rate bonds relative to fixed and creating opportunities for managers to cut funding costs on fixed-rate debt. Jefferies claims the reduction on the coupon by 200bp or more can save the manager hundreds of thousands, or even millions, of dollars each year.
Recent repricing and refinancing has focused on 2017-2018 vintage CLOs, which issued as Libor rates were increasing, offering the most attractive compression for the manager on deals that have left their non-call periods.
Further repricings are anticipated, with notices issued for two Sound Point CLOs, XVIII and XIX, indicating that the manager and equity were exploring either a repricing or a refinancing.
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“High level disclosures are no longer sufficient”
Jessica O’Mary, Partner | Ropes & Gray
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