3How does it happen?

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CLOs often start with a warehouse phase in which the manager accumulates the intial portolio. The manager or another investor stumps up the initial investment which is then leveraged with debt funding, usually from the arranger.

The pricing date is the day orders for the CLO are finalised and the arranger allocates the CLO liabilities to different investors.

Closing date is the day the CLO comes into legal existence and interest on the notes starts to accrue. It is usually around four weeks after the pricing date. The effective date is the point at which the manager declares that the CLO is fully ramped up, and the CLO coverage tests start to apply.

The reinvestment period lasts from the effective date until some pre-determined date in future, often four years after the closing date. After the reinvestment period, the manager stops making new investments, or is only able to make certain purchases.

CLOs rarely run until their legal maturity. Equity investors usually call the CLO several years earlier, meaning that the notes are repaid and the deal comes to an end. end

 

 

Life story of a typical CLO

Planning/soft marketing

Manager and arranger discuss creating CLO.

Arranger in discussion with a bank which it believes would be interested in buying the entire triple A notes.

Manager knows a fund manager that would be interested in taking equity.

Warehouse opens

Anchor equity investor provides capital for warehouse and arranger provides financing.

Manager starts buying loans.

Marketing launch

Arranger circulates terms of the deal to prospective investors.

Arranger and manager go on brief roadshow meeting investors in New York, London and one other major city.

Pricing

Deal terms and allocations are finalised.

CLO is now 70% ramped up.

Arranger gathers together remaining documents and manager steps up pace of ramp-up.

Closing

CLO comes into legal existence.

Manage​ment fees and interest on the notes start to accrue.

CLO is 90% ramped up.

Effective

Manager is satisfied with the yield and diversity of the portfolio and declares the deal effective.

Rating agencies confirm that the portfolio satisfies their requirements and the CLO tests start to apply.

First payment date

CLO pays first coupon on notes and makes a healthy distribution to equity investors.

End of non-call period

Equity investors may now call the deal but choose not to do so.

End of reinvestment period

The CLO starts paying down its most senior notes.

In this deal, manager still has ability to make some new purchases.

Call

Triple A notes have now been reduced to 50% of their original amount.

Equity investors vote to redeem the CLO.

CLO redeemed

Manager sells the CLO’s loans.

On the next scheduled payment date, the CLO repays all its notes and makes a final distribution to equity investors.

Turn to the print version of the CLO guide to find out:

Typical terms for CLO warehouse funding

How discounts on CLO notes and upfront fees affect the amount of money the CLO has available to invest

How CLOs differ in what the manager is able to do after the end of the reinvestment period

What considerations determine the timing of the CLO call?

How CLO investors can change the rules and participants of the deal during its life

What can cause an event of default and what happens then?

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