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Analysis
‘It’s rare something is both issuer and investor friendly’
by Lisa Lee
In 2015, Apollo’s Albert Huntington invented CLO resets. But the most important thing he learned back then was how flexible CLOs can be if you get consent from all equity holders
As the CLO market marks the 10-year anniversary of the reset, Creditflux caught up with the two individuals who came up with the technology: Apollo’s Albert Huntington (now the head of structuring and advisory at Redding Ridge) and Bret Leas (now head of global structured finance at Apollo and a board member at Redding Ridge).
In 2015, Apollo had a CLO called ALM 6, a strongly-performing transaction that was getting close to the end of its reinvestment period. The prior paradigm had always been to do a call and roll, or refinancing. Instead, Apollo reset the deal and the rest is history.
“I came up with the idea because Bret was yelling at me to do a refi,” jokes Huntington. “Bret asked me to run the refi math, and while it was positive, it wasn’t the most exciting refi, even for refis.”
CLO resets 2015-25 ($bn)
Source: Creditflux
For Huntington, the question was how could he better align what he wanted do — which is manage the CLO’s assets for a longer period — and make money for everyone relative to a refi.
“In a refi, we’d spend some money, lower our cost of capital, and maybe extend our timeline a little bit on managing those assets,” says Huntington. “So we flipped that around and the model showed that it was going to be super accretive.”
“He does this constantly,” says Leas, referring to Huntington coming up with new ideas. “Most of the time he wins. And we just try it anyway. Some things go into the dustbin because they’re either not market-adopted or not efficient. For example, our PIKable double A was a good structure, but it never became market standard.”
Who can this technology benefit?
“We debated this extensively because there’s tension,” adds Leas. “I think your brain naturally says, OK, is this good for me? Then you have to ask, is it good for somebody else?”
They had to consider the investors, the banks that are in the triple A paper, the third-party funds, as well as the bankers and the lawyers. Then the Apollo team had to consider whether they could show the secondary trading market that this paper should trade well. “How do you decide where to price? It took us a long time,” says Leas. “Even today, resets typically price at a slight premium to new issue.”
Bret was yelling at me to do a refi
Albert Huntington
Head of structuring and advisory
Redding Ridge
After Apollo pulled off the first reset, the equity investors in the deal began suggesting resets to other managers, says Huntington. Soon everyone was doing resets.
Resets gained wide adoption because they have advantages for both the issuer and the investor, says Leas. “It’s rare, in my opinion, that when you do something that involves altering the capital stack that both sides can win. Most of the time it’s issuer friendly, not investor friendly. This is both.”
Resets helped accelerate the growth of CLOs by reducing friction, says Huntington. “The real paradigm shift was proving you can do almost anything you want if you can get 100% consent.”
Most of the time he wins
Bret Leas
Head of global structured finance
Apollo
Leas thinks the reset technology he helped introduce can sometimes be taken too far. He compares it to the degradation that occurs if you make copies of copies of old video tapes. “By the third reset, you probably should get rid of the deal.”
Here Huntington disagrees. “I wish ALM 6 had never gone away,” he says.
