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My way or the highway: BlackRock CLO contains force-sell provision

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BlackRock Financial Management’s first CLO of 2019 has a noteworthy redemption feature: the manager can force disagreeable investors to sell off their notes to buyers of BlackRock’s choosing.

According to a presale report published by Moody's Investors Service for the $655.9 million Magnetite XXII collateralized loan obligation, any noteholder who refuses to agree to a proposed amendment to the deal – including a refinancing – could be forced to sell, even if the deal is still in its non-callable period.

It was not stated in the report whether this provision has been included in prior CLO issues from BlackRock. A market observer told Asset Securitization Report the provision is a way to "address a holder if they are not consenting to an amendment that everyone else wants to happen."

Under what Moody’s calls a “non-consenting holder liquidity offering event,” if a noteholder “does not consent to a proposed amendment to the indenture, then the issuer may require such non-consenting noteholder to sell its notes to one or more transferees identified by the manager.”

If a noteholder will not consent to a change in the deal, the investor must notify the deal’s trustee within five days of notice for a refinancing, or 10 days for “any other proposed amendment,” Moody’s legal structure analysis of the deal states.

Any notes being force-sold would be redeemed at face value, plus any accrued and unpaid interest, the report added.

The $393.25 million of senior Class A-1 notes with provisional Aaa/AAA ratings from Moody’s and S&P Global Ratings are expected to pay 133 basis points over Libor. A second Aaa tranche of Class A-2 notes totaling $337.75 million ranks lower in the payment waterfall, pays 160 basis points. (Typically, wider spreads on similarly rated notes indicate longer duration to maturity.)

The transaction will build BlackRock’s U.S. CLO assets under management to $7.25 billion across 12 deals.

As of Wednesday, BlackRock had identified some 87% of the assets for Magnetite XXII; these loans have a weighted average life of 6.55 years and a weighted average spread of 3.24%. over Libor.

The transaction will have a two-year noncall and a five-year reinvestment period, during which BlackRock can buy and sell underlying loan assets with excess principal proceeds in order to improve the credit quality of the deal.

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