February 01, 2018
David Quirolo comments on European CLO spreads.
Excerpts from " Tightening CLO Spreads to Drive Further Refis and Resets; Document Restrictions and Brexit May Prompt Managers to Opt for Reissuance," CapitalStructure, February 1, 2018:
The motivation behind refinancings, resets and reissues is generally an exercise to reduce the interest rate on rated notes and to increase residual cashflows to equity holders. However, the consequences of Brexit could drive CLO reset and reissuance activity, according to David Quirolo, partner at CWT.
"If a manager wants to make a change to the way in which the retention piece is held, a full reset or liquidation/reissue of the deal might be necessary," said Mr. Quirolo. "Depending on the outcome of Brexit and its impact on UK CLO managers, we could see more reset or reissued CLOs as a result."
Post Brexit, UK sponsor retention vehicles may not meet certain regulatory requirements: specifically, UK managers will not be MiFID-licensed and will need to take an alternative route in order to comply. Most UK managers currently employ sponsor retention vehicles. "However, I'm cautiously optimistic that UK managers will be able to continue using a sponsor structure post Brexit," added Mr. Quirolo.
As much as €24bn in refis and resets was completed in 2017. While refinancings are deemed a relatively straightforward process, resets and reissuances are more complex, requiring the input of several parties, and can include a number of changes to the transaction.
"A reset is essentially a new deal," said Mr. Quirolo. "The maturity date is extended and rating agency criteria is updated. Depending on primary market conditions, a deal may upsize. Older deals that were less levered may be brought into line with current market norms," he said.