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No smoking please: Refi of 2016 Sound Point CLO bans tobacco assets

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Tobacco loans are a scarce commodity. But Sound Point Capital Management is still declaring them off limits for a 2016-vintage collateralized loan obligation it is refinancing.

In a press release published Friday, Fitch Ratings said that the $706.8 million Sound Point CLO XII has a new clause in effect that will “prohibit assets that are classified in the ‘Tobacco’ S&P industry,” within deal document descriptions of loan asset concentration limits.

The release did not say whether the deal originally issued in August 2016 had tobacco assets, but such loans are rarely held by CLOs, according to a 2018 report from Moody's Investors Service. Only 4.19% of global CLO assets are tied to junk-rated companies in the beverage, food and tobacco industries, under the criteria of excluded investments under the European Union’s proposed environment, social and governance (ESG) standards for green-friendly investing, according to Moody's.

Restricting CLOs to the universe of loans that ESG standards can result in higher costs. However, the credit effects would only be “marginal,” the Moody's report stated. “[B]ecause CLOs we rate likely have minimal exposures to the industries excluded by ESG mandates, and because CLO managers have discretion to ex ante define ESG compliance, these negative effects will likely be immaterial.”

Sound Point isn't alone. U.K. private equity firm Permira issued two CLOs in the European market last year under ESG standards that restricted tobacco-industry asset exposure as well as to loans tied to oil and gas; chemicals, plastics and rubber; metals and mining; plus hotel, gaming and leisure.

Permira’s criteria for the €362.5 million Providus CLO 1 and €350 million Providus CLO II only excluded issuers which gained more than half their revenue from the restricted business activities, according to Moody’s.

Fitch's release stated another noteworthy revision to the deal: Sound Point has inserted fallback language agreement for a future replacement benchmark rate to price deal notes should a published Libor rate end after 2021.

Moody’s and Fitch issued final triple-A ratings for the $451.5 million replacement Class A-R notes in the Sound Point CLO XII deal. The notes were priced at 129 basis points over Libor on Feb. 14 through Credit Suisse, according to a report from Deutsche Bank.

The non-call period will be extended to March 2020 for the transaction, but the remaining 20-month reinvestment period remains unchanged.

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