Moody's says it did not foresee likelihood of KKR CLO tear-up

Moody’s says it believes the recent developments affecting three KKR CLOs, in which an affiliate of the manager tore up its mezzanine notes allowing the deals to come back into compliance with their overcollatearlisation tests, are unlikely to herald a wave of similar actions in other CLOs. In a special report published last week, the agency pointed out that note cancellations do not require a rating agency confirmation, and Moody’s had considered the likelihood of cancellation of the notes to be too low to affect the ratings of any of the deals.

It said that the likelihood of similar actions taking place was low provided that the CLOs have multiple unconnected holders of the mezzanine and subordinated notes. However, that leaves open the possibility that there may be more note cancellations for deals where one investor owns several parts of the capital structure.

KKR’s moves are likely to have angered senior investors in the deals. As a result of the deals coming back into compliance with their par value tests, cashflows that had been diverted to the senior notes will now be available to make payments to the equity and remaining mezzanine notes.