Post-reinvestment doesn’t mean no more reinvestment

Tom Davidson

Managing editor

As more CLOs exit their reinvestment period, an increasing amount of attention is turning to the details of the post-reinvestment language that controls what managers can do

An interesting panel at the ABS East 2023 conference last month looked at the gap between projections and reality for tranche pay-down rates. A presentation from independent investment bank Raymond James provided the numbers. Looking at the average tranche factors for US BSL CLOs, 18 months after the end of the reinvestment period, the projected factor should be 0.54. The actual average was 0.75. Even more interesting was the wide range of results from deal to deal.

The presentation concluded that investors need to be mindful that ultimate tranche durations might be longer (or shorter) than expectations and consider pricing implications. It also suggested they need to do their homework on post-reinvestment period trading rules on a deal-specific basis.

Average quarterly paydown rates for US BSL CLOs from end of reinvestment period (%)

Source: Raymond James

CLO document analysis firm Dealscribe has looked at post-reinvestment period flexibility for some time. Its D-score reflects the flexibility of the CLO rules from a manager’s point of view, where five is most flexible and zero is least flexible. The score combines language on post-reinvestment WAL tests, rating requirements and any other test impacting reinvestment flexibility.

The average values for different managers (see tables), highlight the wide range of language incorporated in CLOs. For large US managers with 10 or more deals outside their reinvestment periods, D-scores vary from 3.62 for LCM Asset Management to 1.75 for KKR. It’s also worth noting how much more constrained European CLO managers are than their US counterparts.

Manager averages can be a blunt tool though. “A few managers, such as Aegon and Voya, tend to have consistent post-reinvestment language,” says Dealscribe founder Mike Peterson. “But for most managers, terms vary from deal to deal, depending on which stips the manager had to agree with debt investors to get the deal done. This means that deals from the same manager could pay down at very different speeds.”

*CLO managers with 10+ deals outside reinvestment period

Average post-reinvestment D-score for currently outstanding euro-denominated broadly syndicated CLOs (including static) with post-reinvestment end date up to 31 December 2023 for managers with five or more deals modelled on Dealscribe.

Score is based on post-reinvestment WAL test pass requirement, strict pass requirements other than OC and rating requirement.

Share this article:

${prev-page}

${next-page}