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October 12, 2018  

CLO Refis Swing Back Toward Short Terms

Collateralized loan obligation issuers are suddenly favoring short-term refinancings.

Issuers had for months been leaning away from those arrangements, in which outstanding bonds are assigned new terms that include reinvestment periods of up to two-and-a-half years. Instead, the operations gravitated toward so-called reissues in which they create new bonds with reinvestment windows of about five years.

But funding costs have fallen for the shorter-term arrangements, while remaining unchanged for the longer-term ones. Indeed, prevailing spreads on senior notes from short-term transactions currently are 15 bp tighter than those for reissued securities, versus 5 bp a week ago.

That is causing some issuers that had been planning longer-term reissues to opt for shorter-term arrangements, even though the shift means they aren’t getting to lock up bondholder capital for as long.

Issuers with short-term refinancings in the market this week included Cutwater Asset Management, with RBC running the books; Napier Park Global, via Morgan Stanley; Halcyon Capital, via Barclays; and Wellfleet Credit, via Citigroup. Carlyle Group and Greywolf Capital completed similar exchanges the week before.

Carlyle, working with Citi, refinanced its $508.5 million Carlyle US CLO, 2016-4, with a two-and-a-half year reinvestment period. The firm agreed to pay a spread of 108 bp to senior bondholders, and might have seen that figure shrink to 100-105 bp had it waited until this week. A five-year deal, meanwhile, would go for 115-116 bp.

Why the disparity? Some large fund operators that preferred shorter-term refinancings pulled back from the market as longer-term swaps became more prevalent, citing worries about taking lasting exposures to the deals’ underlying assets. With the two types of deals pricing at similar spreads, meanwhile, issuers didn’t have much incentive to answer their concerns.

The investors still wanted shorter-term positions, however, and recently indicated that they would be willing to accept less-generous returns if those products became more available.

The trend could alter forecasts for the supply of new CLOs. Having already conducted long-term refinancings at a time when spreads generally were widening, the belief was that most issuers would have little motivation to repeat that process soon — opening the door for a simultaneous increase in fresh supply and tighter spreads on those deals early next year.

But with more short-term refinancings taking place, in some cases with the option for managers to call the deals after just nine months, those deals could again be refi candidates sooner than expected — thus potentially drawing investors’ attention away from new offerings. “The market keeps kicking the can down the road,” one issuer said. “It’s creating more backlog when the expectation was the backlog would go away.”