* Managers rethink old deals as senior spreads narrow
* Resets increasingly attractive but equity control key
* Added pressure in 2017, as pricy deals come up for call
By Mariana Ionova
LONDON, Dec 9 (IFR) - Managers looking to capitalise on
rapidly narrowing spreads are bringing CLO resets to Europe for
the first time, but only a select few will be able to use this
method to boost the economics of older trades.
The European CLO market has seen a dramatic tightening in
senior tranches this year, as big-ticket Japanese, European and
US buyers have driven spreads inside 100bp - their tightest
level since the financial crisis.
Aside from triggering a wave of new issuance, the rally has
also prompted CLO managers to revisit existing deals printed in
2013 and 2014, when levels were as wide as 145bp. A slew of CLOs
have refinanced their upper tranches in the last few weeks, with
at least another six slated to come to market.
Apollo pushed the market to a new frontier last week when it
printed the first European CLO reset, a type of refinancing that
reprices the whole transaction. KKR also followed with its own
reset trade this week, clearing seniors at a fresh low of 91bp.
CLO resets are already popular in the US, with a wave seen
this year as managers vie to ensure tranches of their deals
don't run afoul of risk retention rules coming into effect later
Several managers are looking at using this tool in Europe
next year, with some noting it is more attractive than
refinancing because it allows the deal to be extended. This
means they can lock in attractive spreads for longer,
effectively issuing a new deal with old portfolio collateral.
"I think everyone wants to take the opportunity," said one
investor. "I can't imagine, if you can cut the cost of
liabilities, why you wouldn't be doing it. Anyone that can do
it, will do it."
Resets can only be triggered by the equity holders in the
deal, however, which makes them less accessible to managers who
have broadly syndicated the junior risk in their trades.
Many CLO managers could find their hands tied, unable to
trigger a reset without majority control of the equity risk in
these trades despite how attractive the exercise is.
While the benefit to equity holders is clear, several
managers said it is difficult to generate consensus in deals
where the equity is held by six or seven different investors.
"You have to go to all of them and say 'I want you to call
the deal and these are the economics that we think will come out
the other side'," said a CLO manager.
"But if you've got the flexibility, it's an absolute
Both Apollo and KKR were the primary equity holders in the
trades they reset, according to sources.
The rewards are potentially huge for the select few managers
that can corral the equity holders into a reset.
CLO resets are backed by existing collateral - effectively
reducing the ramp-up risk - which has become particularly
attractive due to a persistent lack of leveraged loan supply.
The lack of net new issuance has been a major problem for
managers this year. The dearth of new collateral has slowed down
CLO formation for some, while others have taken more of gamble
by printing deals that are barely ramped.
Taking this ramp-up risk out of the equation is also a boon
to buyers of CLO liabilities.
"It's essentially like a new CLO but with more seasoned
portfolio that you're probably already pretty comfortable with,"
said a second investor.
"Whereas a new issue, which is likely going to come in at
around the same spread, but will have a lot more uncertainty on
the ramp-up and the portfolio."
While refinancing allows managers to capture tighter spreads
on a particular tranche, resetting encompasses the whole CLO and
effectively resets the clock on its maturity and reinvestment
Since resets don't allow managers to pick which bonds to
refinance, they expose them to potentially paying up on riskier
notes. But even so, the benefits are too good to pass up, market
Shedding some 20-30bp off the all-important senior tranche
can translate into roughly 200bp increase on the equity returns,
sources estimated. In Apollo's trade, one source pegged the
uptick in equity returns even higher, to roughly 260bp.
"The Triple As are driving the structure," said a second CLO
manager. "It's worth it, even if you pay a bit more on the
And if the rally in CLOs endures into next year, it could
become even more tempting to try to reset particularly costly
trades printed in 2015.
"These are very expensive liabilities," said the first CLO
manager. "And I wouldn't be surprised if the more aggressive
equity investors start trying to buy control to do the resets.
Because it looks very, very attractive."
(Reporting by Mariana Ionova, editing by Robert Smith and Alex