As did ABN Amro's Loop Funding MT-I in June, other balance-sheet collateralized loan obligations (CLOs) will likely pay out and reissue new series off the same master trust - a prepayment event unrelated to credit, said industry sources.
The reason: the older balance sheet CLOs were generally structured with three-year revolving periods and a call option at the end of the term. The first wave of such CLOs hit the market in 1997.
Currently, the strength of the commercial paper market is incentive for some managers to exercise their repurchase agreements, reissuing into the CP market.
"If you can get a cheaper cost of funding, it makes perfect sense to do that, completely unrelated to credit," said one market source.
The idea is that the manager can leverage the same well-performing collateral pool by issuing notes with a lower coupon, as demand permits.
"It is a pretty interesting trend," said Anthony Thompson, director of asset-backed research at Goldman Sachs. "Because the CP market is so strong, a lot of the securities that have been getting called are going into conduits, and not necessarily the term market."
Loop Funding, approximately $5.5 billion in size, was originally offered in November 1997. The CLO is structured in six parts: two series of class-A notes, two series of class-B notes, and two series of class-C notes.
Though it may make sense for similar CLOs nearing the call option date to reissue, the strategy might not make sense for other collateralized debt instruments, Thompson said. For balance sheet CLOs, the loan maturities are relatively short, and have a higher rate of turnover. Further, the CLOs are less subject to the ongoing portfolio tests that collateralized bond obligations often experience.
"So it makes them a little bit more flexible for the conduit market," Thompson said. Additionally, not all CDOs (or all CLOs) are structured with repurchase options.
Less Happy Stories
Meanwhile, it's said that Societe General's Polaris MT 1999-1 recently hit an amortization trigger and paid down early. As opposed to the Loop Funding, this prepayment event was related to credit loss, similar to deals like the Sanwa Bank Excelsior MT 1998-1, which paid down last fall.
The Polaris deal, which is backed by nearly $2 billion in commercial and industrial loans, was called at par, market sources said.
Separately, last week Standard & Poor's remarked on the need for increased ratings surveillance in the collateralized debt obligation sector, as credit loss and defaults continue to be a trend, especially for deals backed by high-yield debt.
Simultaneously, Fitch placed 11 classes (in five separate CDOs backed by high yield bonds) on ratings watch negative, for credit-related problems.
The affected deals are Northstar CBO 1997-1, Northstar CBO 1997-2, BEA CBO 1998-1, BEA CBO 1997-2, and Shyppco Finance Co. CBO.
Said analyst David R. Howard, "We're working right now to determine which classes of these 11 need to be downgraded, and to what rating they need to be taken to. Within the next few weeks, there'll be significantly more information, at least from us, as to what rating actions need to be taken."
