Tests will not stop CLOs extending loans, says Barclays Capital

Fears that CLO structures will prevent them from granting maturity extensions are not justified, according to a recent research report from Barclays Capital. The bank points out that although weighted average life tests can restrict a CLO’s ability to hold assets of beyond a certain maturity, the vast majority of CLOs are currently passing this test.

This situation will not change much as CLOs approach the end of their reinvestment periods, add the researchers. The fact that prepayment rates have fallen means that the weighted average life of most deals is decreasing, giving CLOs considerable scope to invest in longer dated loans or extend the maturity of existing loans.