CLOs, Leveraged Loans Get Partial Lifeline in Fed’s TALF Changes
CLOs, Leveraged Loans Get Partial Lifeline in Fed’s TALF Changes
(Bloomberg) -- The Federal Reserve revised its Term Asset-Backed Securities Loan Facility to allow CLOs that hold a broader range of leveraged loans to be used as collateral.
The Fed will now accept new AAA CLOs with leveraged loans, including refinanced loans, that priced as far back as January 2019, according to a statement Tuesday on the central bank’s website. Previously, eligible collateralized loan obligations could only hold newly-originated loans.
The Fed’s decision should help increase demand in the $690 billion CLO market, which so far hasn’t benefited much from the central bank’s effort to boost credit liquidity. Yet the changes will only go so far, market watchers say. The terms still require eligible CLOs be static vehicles wherein managers can’t actively trade the loans underpinning the deals, a structure that makes up only a small portion of the market.
“It’s not going to open up the floodgates, but it can have some measured effects,” said Gregg Jubin, a partner at Cadwalader Wickersham & Taft LLP. “This looks certainly better than the first iteration.”
The changes may particularly benefit existing CLO warehouses that hold qualifying loans, added Jubin. CLOs typically use warehouse credit lines to buy and store loans before going out and marketing the deals to investors. Many remain stuck with the banks that financed them as today’s wider liabilities crimp CLO arbitrage -- the difference between the interest paid to buyers of the securities and the income collateral managers generate from the underlying loans.
The interest rate offered under TALF will be 150 basis points over the 30-day average Secured Overnight Financing Rate.
It’s “a positive sign for the market that the look back for eligible collateral extends back to the beginning of 2019 and also includes refinancings since that time, as is the fact that the Fed appears to have taken into consideration certain detailed aspects of how the CLO market operates,” said Nick Robinson, a partner at Allen & Overy LLP.
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