CLOs will be able to continue reinvesting, says S&P

Thursday, September 30, 2010

A new report by Standard & Poor’s examines the role that CLOs can plan in refinancing maturing US leveraged loans

Comment by: Anonymous. Posted 13 years ago [2010-10-04 18:01:13]

Yes.. this reinvestment opportunity of prepays/recoveries even after the end of reinvestment period is very profitable for the Equity as it maximizes the excess cashflow recieved. This is good for BB also as there is more interest proceeds to service the liabilities and if thay have Fixed Coupons they will also get rewarded by better interest coverage....

Comment by: Fishknife -. Posted 13 years ago [2010-10-01 10:16:26]

It is interesting that S&P believes CLOs will be able to reinvest beyond their reinvestment period. The biggest impediment to them doing so is not compliance with OC tests, it is the fact that most deals can only reinvest after the end of the reinvestment period if their liabilities have not been downgraded. Typically, a CLO that has a mezz tranche downgraded by two notches or has its senior notes downgraded at all is barred from any kind of reinvestment. But here is the curious thing: most CLO docs only refer to Moody's downgrades, suggesting this was a requirement insisted on by Moody's but not by S&P. Clearly, S&P believes that its rival will have upgraded most CLOs back to their original ratings by the end of their reinvestment periods,allowing them to keep buying loans.

Comment by: Anonymous. Posted 13 years ago [2010-09-30 18:43:40]

Wow - this is surprising. My simple understanding is that CLOs stop reinvesting at the end of the reinvestment period. If this situation is ambiguous, CLO managers will want to extend their deals which should push down the current prices of the highest tranches.

CLOs

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