Senior CLO noteholders awake to the strong possibility that recent vintage deals could be called, putting them at risk of having to reinvest their funds in lower-yielding assets.

According to anaysts at the Royal Bank of Scotland, they are trying to do something about it. In a report published today, Richard Hill and Kenneth Krosner said there have been some “structural developments” to potentially mitigate the call risk, including negotiating “make whole clauses” and original issue discounts.

“In fact, these features can potentially offer higher returns in such a call scenario,” the analysts wrote.

Spreads on leveraged loans have tightened by some 100 basis points since the end of 2012, leading investors to accept lower spreads on bonds issued by collaterized loan obligations. This has led to much speculation that equity holders will call a number of the 2011-vintage deals exiting their non-call periods this year.

In fact, the first 2011 CLO, Fraser Sullivan V, was recently refinanced on Feb. 12, according to RBS.

RBS calculates that 20 out of 26 CLOs issued in 2011 will exit their non-call periods this year, giving the equity the ability to exercise their redemption options

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