New wave of amend-and-extends will push CLO maturities out, says RBS

Many CLO managers believe that their indentures allow them to participate in amend-and-extend transactions even if they do not meet a CLO's reinvestment criteria, according to research published by Royal Bank of Scotland this week. In his latest CLO Market Review, CLO strategist Justin Pauley says that amend-and-extends are likely to rise in popularity, as loan spreads rise, since they are often the cheapest way for issuers to extend upcoming maturities.

CLO indentures are rarely explicit on their treatment of these loan amendments. As a result, many managers believe that they do not qualify as loan purchases and should be allowed, according to the report, even if their terms do not satisfy a CLO's investment criteria. Some managers even take the view that CLOs are allowed to extend loan maturities beyond the legal life of the CLO, writes Pauley.

The issue of how amend-and-extends are treated has become more relevant in the light of the recent wave of Moody's CLO upgrades. Previously, many managers were unable to reinvest principal prepayments because their deals had lost their original Aaa ratings on the senior class.

The RBS report points out that amend-and-extends are not necessarily negative even for first-pay investors, since they are often an alternative to a new loan, that would have carried a much longer maturity.