Another CLO manager has refinanced a senior tranche of securities before the coupon stepped up to a much higher rate.
Ares Management refinanced a total of three of the debt tranches of its Ares Enhanced Loan Investment Strategy IR, according to Deutsche Bank. In particular, a senior, AAA-rated tranche that originally paid 100 basis points over Libor at issuance in the summer of 2013, but had stepped up twice, to Libor plus 150 basis points in early 2015 and then to Libor plus 175 basis points in January this year.
The new tranche replacing the step-up tranche will pay just Libor plus 140 basis points, 35 basis points lower than were the step-up coupon had gone up to but still 15 basis points wider than the coupon of the original AAA tranche issued alongside and pari-passu with the step-up tranche.
Ares also used the opportunity to refinance a fixed-rate, AA-rated tranche with a coupon of 4.31% into a tranche at Libor plus 205 basis points and a single-A rated tranche bringing the coupon down to Libor plus 290 from Libor plus 305.
The CLO has one year left of its reinvestment period.
The refinancing is the tenth of the year with eight of those being step-up tranche refinancings.
So-called step up tranches were one of the strategies that CLO managers adopted to attract new investors after issuance dropped in 2013. Regulatory changes made CLO securities less attractive for banks, traditionally big buyers of the senior tranches. The short initial terms appealed to investors who wanted a relatively high return without locking their money up for too long.
But a number of managers were initially unable to refinance the tranches and avoid paying the higher coupon because spreads had widened significantly.
Spreads have been moving in for several months, however. A CLO from Babson Capital Management that priced on Friday was the tightest that we have seen at most levels since the middle of last year. The senior tranches of some recently priced deals pay Libor plus 145 basis points, Deutsche said in research published Wednesday. This is allowing more managers to refinance step-up tranches at narrower spreads.