Junior debt investors gain seat at Euro CLO negotiation table

Sayed Kadiri

Editor

CLO documentation and structural negotiations are no longer limited to triple A noteholders and majority equity investors in Europe. Sources say a combination of factors means junior debt investors are also getting input.

There are now opportunities for even single B CLO debt investors to have their say on documentation — despite this tranche being the lowest debt class and also the thinnest tranche in the capital stack. But the size of this tranche and the unique nature of the bond, which sits just above equity, can play into the hands of buyers.

“Investors have more flexibility to dictate terms when closing out the books on junior mezz,” says New York-based Ronnie Jaber, head of loans and structured credit at Onex Credit Partners. Jaber invests in CLO tranches globally and says that the investor base for single B and double B European CLO tranches is limited, which means buyers can influence deals.

“Changes to the CLO structure and portfolio must benefit all investors”

Elena Rinaldi, Portfolio manager | TwentyFour Asset Management

In one example of a structural quirk that was introduced at the behest of junior debt investors, Invesco Euro CLO VIII included a turbo tranche at the single B level when it priced on 16 May.

London-based Elena Rinaldi, portfolio manager at TwentyFour Asset Management, points out that last year, mezzanine and junior debt investors were able to fight back when some CLO issuers attempted to pass through amendments with consent only from the controlling class of investors (triple-A noteholders).

This included items such as changes to the reinvestment criteria and other features that have more bearing on equity and junior debt tranches rather that senior notes.

“Mezzanine and junior debt investors are much more involved now with amendments,” she says. “That episode [last year] highlighted that changes to the CLO structure and portfolio must benefit all investors.”

Typically, senior debt investors take a conservative approach to CLOs and prefer limited trading ability so that deals can amortise quickly after the end of the reinvestment period. On the other hand, equity investors generally prefer giving managers as much opportunity to generate alpha as possible.

Mezzanine and junior debt investors fall somewhere between these extremes, depending on their proximity to the wings of the capital structure.

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Global credit funds & CLO's

June 2022 | Issue 246

Published in London & New York.