(Bloomberg)—Pretium Partners is betting that the transition to a new lending benchmark next year will be chaotic for the $850 billion U.S. market where risky buyout loans are packaged into bonds.
The money manager anticipates that the collateralized loan obligations it’s selling now, including one it sold on Dec. 3, will have to pay unneccessarily higher interest rates as soon as next year, when the securities start using the Secured Overnight Financing Rate as their benchmark. So it’s adding provisions to those CLOs that will allow it to essentially refinance the securities after just a year instead of the usual two years, said Jerry Ouderkirk, head of structured credit at Pretium, in an interview.
Pretium is trying to navigate what is expected to be a complicated shift away from the scandal-plagued London interbank offered rate, a benchmark tied to trillions of dollars of obligations. Regulators have been warning financial firms for years about the importance of fixing documentation for a wide array of products, from interest-rate derivatives to leveraged loans.
The relatively high interest rates that collateralized loan obligations will have to pay stem from the procedures for switching benchmarks on the securities. The CLOs that are issued now generally have to move to SOFR when at least half the loans in their portfolios are tied to the new rate. Beginning in 2022, new deals are required to stop using Libor, though older transactions are allowed to use it till the middle of 2023.
But when CLOs drop Libor, they are contractually obliged to pay investors extra interest to compensate for the fact that the old benchmark rates tend to be higher than the new ones. It’s tricky to figure out how big that extra interest, known as a credit spread adjustment, should be.
For example, the Alternative Reference Rates Committee, a group backed by the Federal Reserve, recommended that existing assets tied to three-month Libor, such as CLOs and some loans, use an adjustment of about 0.26 percentage point, or 26 basis points when switching to SOFR. That’s based on a five-year average difference between the new and old rates. But some recent loan deals tied to SOFR priced with three-month adjustments at around 15 basis points, because whatever the difference was historically, the old and new rates are much closer to each other now.
Most CLOs sold this year are set up to automatically use the ARRC adjustment, which is probably too high, Pretium’s Ouderkirk said. That could potentially boost the funding costs for CLOs, cutting into the income that the riskiest securities, known as the equity, can receive.
“The prescribed three-month ARRC credit spread adjustment at 26 basis points may turn out to be high relative to where market pricing is at any given moment in the future,” he said. “The problem is, that prescribed adjustment will stay at 26 basis points until those deals which have it are able to refinance or reset.”
That’s why Pretium’s CLO sold this month, called Crown Point CLO 11, can’t be bought back, or called, for one year. That differs from the typically longer two-year non-call period that most CLOs adhere to. The firm plans to sell other future deals with shorter maturities for similar reasons.
“We have a view towards a variety of potential SOFR transition outcomes, and we’re trying to design our new issuance thought process and secondary investing strategy to encompass the majority of the higher probability outcomes,” Ouderkirk said.
CLOs are unique in their ability to refinance over and over again. Once a CLO is eligible to be called, managers can refinance or reset the securities they issued whenever they wish, to cut their funding costs.
Reset transactions differ from refinancings as issuers are able not only to reprice at a lower rate, but also may tweak various features of the existing CLO, including shortening maturities. This has been an all-time record year not only for new CLOs, but for CLO refinancings and resets too. There have been around $106.3 billion of CLO refinancings so far this year, and about $133 billion resets, according to data compiled by Bloomberg.
CLOs, which securitize bundles of leveraged loans, typically last about four to five years before their managers sell the portfolio, pay the CLO bondholders and give the remaining cash to investors in the riskier equity part of the deals.
Spread Adjustment
More than 20 companies have recently used SOFR in the leveraged loan market rather than Libor, but CLOs are transitioning more slowly. So far, there have only been two CLOs to partially switch to SOFR: a CLO reset from Onex, and a new-issue transaction from Marathon Asset Management. Each features one portion of its bonds linked to the new rate, while the other tranches remained tied to Libor.
It is expected that a CLO with all of its tranches tied to SOFR may surface as soon as January, although all or most of the underlying loans will still be based off Libor, according to Pretium. A SOFR CLO with most or all SOFR loans may not happen until at least the second quarter, strategists have said.
–With assistance from Lisa Lee.
© 2021 Bloomberg L.P.
Hi there, i read your blog occasionally and i own a similar one and i was
just wondering if you get a lot of spam feedback? If so how do you stop it,
any plugin or anything you can advise? I get so much lately it’s driving me crazy so any support is very much
appreciated. aid ukraine
fantastic post, very informative. I ponder why the other experts of this sector don’t realize this. You must proceed your writing. I’m sure, you have a great readers’ base already!
magnificent submit, very informative. I’m wondering why the opposite specialists of this sector don’t notice this. You must proceed your writing. I’m confident, you’ve a huge readers’ base already!
It’s difficult to find knowledgeable people on this topic, but you sound like you know what you’re talking about! Thanks
After all, what a great site and informative posts, I will upload inbound link – bookmark this web site? Regards, Reader.
I absolutely love your blog.. Great colors & theme. Did you create this site yourself? Please reply back as I’m wanting to create my own website and want to know where you got this from or exactly what the theme is named. Kudos!
Good info. Lucky me I reach on your website by accident, I bookmarked it.
This is a very good tips especially to those new to blogosphere, brief and accurate information… Thanks for sharing this one. A must read article.
So the next time you re craving noodles, go for one of these low-carb pasta alternatives. is tamoxifen a chemo
Right away I am going away to do my breakfast, afterward having my breakfast coming over again to
read further news. zabawki dla dorosłych
6 and a negative sulfonylurea panel screen. is doxycycline a powerful antibiotic
Double Glazing https://maps.google.tn/url?q=https://doubleglazing.yolex.co.uk/
Double Glazing https://toolbarqueries.google.es/url?q=https://doubleglazing.yolex.co.uk/
Double Glazing https://cse.google.co.uz/url?q=https://doubleglazing.yolex.co.uk/
Double Glazing https://toolbarqueries.google.co.jp/url?q=https://doubleglazingcompanies.updateyourhome.uk/
Double Glazing https://cse.google.ie/url?q=https://doubleglazinginstaller.updateyourhome.uk/
Bathroom Fitters https://maps.google.gm/url?q=https://bathroomfitters.yolex.co.uk/
Auto Locksmiths https://google.cl/url?q=https://autolocksmiths.yolex.co.uk/
Bathroom Fitters https://clients1.google.com.gi/url?q=https://bathroomfitters.yolex.co.uk/
Carpet Cleaning https://cse.google.com.tw/url?q=https://carpetcleaning.yolex.co.uk/
CCTV Installation https://cse.google.com.mt/url?q=https://cctvinstallation.yolex.co.uk/
Domestic Cleaners https://google.bs/url?q=https://domesticcleaners.yolex.co.uk/
Locksmiths https://toolbarqueries.google.co.nz/url?q=https://locksmiths.yolex.co.uk/
Loft Conversions https://maps.google.ms/url?q=https://loftconversions.yolex.co.uk/
Oven Cleaning https://www.google.gl/url?q=https://ovencleaning.yolex.co.uk/
TV Aerial Installation https://cse.google.co.ve/url?q=https://tvaerialinstallation.yolex.co.uk/
Buy UK Grass and Wildflower Seed Online. https://toolbarqueries.google.com.kh/url?q=https://idealseed.co.uk/
Buy UK Wildflower Seeds Online https://cse.google.com.sl/url?q=https://wildflowerseeds.online/
Thank you. It is very good wahat you write. I am delightes. Maybe you can check this subject: woocommerce plugins
Compare Skip Hire Suppliers Birmingham https://clients5.google.com/url?q=https://skiphirecomparison.co.uk/areas/birmingham/
The problem with the old school bakeware made of metal is that they rust.
안녕하세요. 제 웹사이트는 성인사이트에 관한 주제를 다루고 있습니다. [check message : YETIE MASSAN]
안녕하세요 저는성인사이트에 관련된 웹사이트를
관리하고 있습니다. 관심이 있다면 방문하지 않을래?
[Check message : massan yetie]
안녕하세요 저는 성교에 관심이 많은 사람입니다.
안녕하세요 저는 강간에 관심이 많은 사람입니다.
정말 위대한 첫 발걸음이네요! 저는메이저사이트 바로가기에 관한 비슷한 글에 관심이 매우 많습니다.과거와는 다르게 관련있는 베스트 블로그를 보는 것은 쉽지 않습니다
글을 정말 잘 쓰시네요 저는토토놀이터에 관한 블로그에 관심이 매우 좋아 합니다.이번주 들어 이런 위대한 글을 체크하는 것은 쉽지 않습니다
Hello. Thank you for always good blog노래방알바
You should take part in a contest for one of the most useful websites on the web. 스포츠토토
Those are yours alright! . We at least need to get these people stealing images to start blogging! They probably just did a image search and grabbed them. They look good though!
Saved as a favorite, I really like your blog!
This is a topic close to my heart cheers, where are your contact details though?
I would like to thnkx for the efforts you have put in writing this blog. I am hoping the same high-grade blog post from you in the upcoming as well. In fact your creative writing abilities has inspired me to get my own blog now. Really the blogging is spreading its wings quickly. Your write up is a good example of it.
Hello! I could have sworn I’ve been to this blog before but after browsing through some of the post I realized it’s new to me. Anyways, I’m definitely happy I found it and I’ll be book-marking and checking back frequently!