NEW YORK, Jan 30 (LPC) - All five tranches in the first auction for a Collateralized Loan Obligation (CLO) with an embedded repricing feature traded Thursday.
The US$240m Triple A tranche of the TCW 2019-1 CLO, overseen by TCW, which has an Applicable Margin Reset (AMR) feature, reset the coupon to 107bp from the current margin of 144bp, according to two people familiar with the auction results. The so-called “cap margin,” the highest spread that was going to be accepted, was 115bp.
Settlement is scheduled for February 18.
This was the first auction to test AMR so the CLO market was keen to see how it went, as a successful process could mean more managers may employ AMR in the future. In the last three years, seven funds have been issued, including one reset, with AMR technology, according to KopenTech.
Janney Montgomery Scott, Brownstone Investment Group, BNP Paribas, MUFG, RBC Capital Markets and Raymond James were the broker-dealers signed on to bid for clients in the auction, one of the sources said.
KopenTech facilitated the process as auction host.
The AMR CLO structure, which is modeled on auction-rate securities, was developed so CLOs could reprice without running afoul of Dodd-Frank risk-retention rules that forced managers to hold 5% of their fund.
After a US Appeals Court in 2018 ruled that CLOs backed by broadly syndicated loans are exempt from retention requirements, some managers and investors decided to stick with the structure because of the built-in auction process that is pitched as cheaper and faster than a traditional refinancing.
The auction allows participants to submit interest rates they are willing to receive for owning the fund’s debt tranches. Offers must be lower than the existing spread. If there is a winning bid that clears the entire tranche and other conditions are met, there would be a tender offer and the notes would transfer.
Sancus Capital Management helped develop the structure, with the first CLO issued with AMR technology in 2017 by Crescent Capital Group with MUFG.
“We are super thrilled to see our idea get implemented and that it worked. It’s very rewarding to see that the market liked it,” said Olga Chernova, chief investment officer at Sancus.
“Sancus had many partners in this venture. Special thanks to the banks who joined the platform and decided to be the pioneers, as well as the amazing technology team at KopenTech,” she said. “It was fun to work with them on this project.”
A TCW spokesperson declined to comment. (Reporting by Kristen Haunss; Editing By Jon Methven)