Tuesday, August 14, 2012

As firms chip away at the maturity wall, CLOs are having trouble finding short-term paper

Since 2009 leveraged companies in the US have been pushing out the wall of maturities created by frenzied LBO activity prior to the financial crisis. These days they are continuing to chip away at the 2014 maturity.
LCD: - So far this month, issuers have completed or announced opportunistic transactions that address $9.8 billion of loans maturing in 2014... These include bond-for-loan takeouts, amend-to-extend exercises, and loans to refinance shorter-dated loans. Some executions have been large, with Community Health Systems, ServiceMaster, and First Data poised to clear away more than $1 billion apiece of their 2014 maturities.
Source: LCD
According to LCD, this is creating a shortage in short-term corporate loans. CLOs that are still reinvesting collateral (replacing loans that have partially or fully repaid) have restrictions on the weighted average life (WAL) of the collateral. The goal of these restrictions is to make sure there is no significant mismatches between the maturity of the CLO and the maturity of the loans in the collateral pool. Because of these restrictions, CLOs that will be maturing in the next few years (and are still reinvesting) are only allowed to buy shorter maturity loans. But as the companies push out maturities of their liabilities, the amount of short-dated loans in the market declines. That trend is creating a shortage, tightening spreads for nearby leveraged loan maturities.
LCD: - With the pool of shorter-dated loans shrinking, there is a strong bid for shorted-dated paper from CLOs as they work to maintain compliance with weighted-average-life tests, traders note.

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