CLO Bondholders Unlikely to Help Managers Fix Libor Problem

(Bloomberg) -- CLO investors are likely to oppose having their payments pegged to the one-month Libor rate, which will crimp efforts by managers to ease the growing asset-liability mismatch with the underlying loans, according to Maggie Wang, a CLO analyst at Citigroup.

More than 60 percent of leveraged loans that serve as collateral for CLOs have switched to one-month Libor, Wang said, while almost all payments from these pay out at the higher three-month rate. More loans are due to roll onto one-month Libor, but bondholders are unlikely to opt for the lower rate especially after supply fatigue and widening spreads have put them in the driver’s seat.

"In one or two deals, CLO equity may have been able to toggle between three-month and one-month Libor on a CLO, but since then it has gotten rejected," John Timperio, partner at Dechert LLC said in interview. "It made sense intellectually, but managers haven’t been able to replicate it."

  • “We believe more issuers will opt for one-month Libor in the future as long as the basis remains wide,” Wang said
    • Credit agreements allow any leveraged-loan issuer to switch the term of the base rate at any payment date, she said
    • If the basis stays as wide as 30bps in the future, CLO equity yield would drop by as much as 3% if another 30% of loan borrowers switch their base rate, according to an April 5 Citi analysis by Wang, Ruslan Bikbov, and Michael Anderson

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