Resetting a CLO deal involves extending the deal’s reinvestment period, unlike a standard refinancing. While there are several costs associated with resetting a deal, equity investors have determined that the benefits of a reset outweigh these costs.
However, resetting a deal can be challenging if the deal has experienced a significant decline in collateral market value, as pricing the (long-dated) liabilities would be prohibitively expensive, especially at the mezzanine levels, even if market conditions are favourable. Typically, it is easier to reset a deal when the deal is performing well, and market conditions are favourable. Essentially, resetting a deal extends the total reinvestment period, which is positive from an equity standpoint. If a CLO deal can generate an annual equity distribution of 15 points for a period of 9 years, the equity is likely to perform reasonably well.
If the reset window reopens, many seasoned deals would like to reset to lengthen their reinvestment period and gain additional WAL test cushions, which puts them in a better position to take advantage of amend-and-extend deals. However, in a strong loan market, spreads will be compressed again, and the benefits of amend-and-extend activities will not be as attractive as in the current market conditions.
Related articles:
IRR of a Recently Fully Redeemed EU CLO deal
Comparing the Performance of Seasoned US BSL and EU CLO Equity Tranches
Global CLOs: Effects of Reset on Reinvestment Period
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The information, research, data, research-related opinions, observations, and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers; authorised personnel, or their directors make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness, or correctness of such sources and the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research-related opinions, observations, and estimates in this document are in draft form as of the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness, or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historical or current position or performance of any of the deals or issues mentioned in it.
