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Investors pursue wide variety of ‘snooze drag’ loan amendment language
by Shant Fabricatorian
Investors were once outraged by what the European leveraged loan market dubbed ‘snooze drag’ clauses — technical language in CLO documentation that regulates whether managers can hold loans after terms are amended. Some even vowed to get rid of it.
But while the more lurid headlines have been left behind, snooze drag hasn’t. Snooze drag lives on as a feature of the European leveraged finance market. Some investors have come to accept maturity amendment language as a necessary part of CLO documentation.
What has emerged is a scattered approach to dealing with snooze drag. A year after the manoeuvre became a European norm, there’s no market consensus on how to deal with the issue. Instead, individual investors are stipulating variations on a deal-by-deal basis, in their efforts to prevent or limit managers from participating in loan amendments without voting for them.
Among the European CLOs that have priced so far this year, these efforts to structure maturity amendment language fall into three main categories. Of 42 deals examined by research analyst Dealscribe, just under a third (13 transactions), include language that requires a manager to sell any asset where the manager has not voted in favour of a loan amendment, but where the maturity is nonetheless extended.
Such deals often include a period during which the manager must sell the asset and, if a sale is not completed (typically within 60 or 90 days), the extended asset is haircut in the overcollateralisation test numerator. That was the case for Arini European CLO II. This involves lower assumed recovery and market value, or even, in some cases, a haircut to zero.
“There is quite a lot of variation in the haircuts being applied,” said Aaron Scott, a partner at Dechert LLP.
There is quite a lot of variation in the haircuts being applied
Aaron Scott
Partner
Dechert
The second approach, which may be termed ‘no prevention’, covers seven of the 42 transactions. All but one of these deals stated that the extended asset must still be sold before the CLO’s maturity date.
The majority, however, can be characterised as ‘vote against’ deals, covering 22 of the 42 analysed deals. Most include explicit ‘for’ or ‘against’ language, and the three which do not — such as Redding Ridge’s RRE 18 — include stipulations that the manager undertake “reasonable endeavours” or “commercially reasonable efforts” to vote (making the language in these transactions similar to that typically found in US deals).
In ‘vote against’ cases, if the obligation is extended when the manager votes against it, some deals undertake a haircut of that asset, while others require the manager to make efforts to sell the asset. Most, however, do not explicitly address this scenario. Of these so-called ‘vote against’ deals, Dealscribe found that only two — Blackstone’s Fernhill Park CLO and Palmer Square European CLO 2024-1 — provide an abstention threshold.
The lack of a single unified approach to maturity amendment language contrasts with the approach implemented by the industry in the case of anti-priming and uptiering in 2022. In that case, faced with the threat of CLOs being cut out of favourable distressed debt exchanges by rival creditors, European managers all adopted wholesale the language recommended by law firms.
However, the differences in approach should be placed in perspective. According to Rebecca Mun, director and lead analyst in the European structured finance team at S&P Global Ratings, today’s CLOs are a lot more standardised in their language and structure than those dating from the pre-crisis CLO 1.0 era.
“There’s a little bit of variation in structure and language, but the differences really aren’t huge,” she said. “But that degree of variation is what keeps things interesting.”
