When the average person hears the words deep discount, a smile is likely to appear. But when a CLO manager hears those words, it can cause them to shiver. That’s because so-called deep-discounted loan substitutions are a huge problem for CLO managers, though some firms and industry organizations have been working to change that by raising awareness on the issue. And they now say they are making progress.
In a market that has seen prices drop dramatically and underlying credit quality deteriorate, CLO managers have been struggling to amend certain indentures that dictate how they manage their CLOs — specifically, how they can swap out deteriorating loans for higher quality, discounted loans. Many of these indentures were written prior to the recession and do not take into account where most loans are trading today.