The Impact of Exiting the Reinvestment Period on CLOs

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By the end of 2023, we estimate that roughly 40% of the CLO market will be outside of its reinvestment period. And so that doesn't necessarily mean that the collateral managers cannot rotate their portfolios, but it becomes exceedingly harder to do so after the reinvestment period has ended. That makes it tougher for CLOs to buy some of the newer loans.

The end of Libor is a little over a week away, and some US corporate borrowers are still racing to switch their floating rate loans to SOFR ahead of the 30 June deadline.

The loan market’s transition away from the old reference rate has been slow, but increasingly contentious in recent months. Borrowers, lenders and financial sponsors have tussled over the compensation offered to loan investors to swap into the lower-yielding SOFR benchmark.

In this week’s edition of Cloud 9fin, US deputy editor David Bell sat down with Dan Ko, a senior principal and portfolio manager at Eagle Point Credit Management to talk about how CLO equity investors rallied loan buyers to resist off-market SOFR amendments — as well as the challenges and opportunities in CLO equity as more deals exit their reinvestment periods.