The standardization of future CLOs' defined terms and structural features can hasten the sector's primary issuance process, Fitch Ratings said in a note released this morning.

The rating agency said that this can also increase liquidity in the secondary market as well as boost investor demand.

CLO documentation is currently deal specific as bankers and issuers negotiate between the debt and equity buyers.

This is a comparatively lengthy process that results in a range of outcomes for buyers to deal with, the rating agency stated. The documents' wording can also be challenging for them.

Fitch analysts cited the definition of "discounted securities," for instance, sometimes shows the structure has equity-friendly features and sometimes more debt-friendly aspects. 

"We believe that using standard frameworks will shorten the primary issuance process and remove one hurdle to investing in CLOs," they added.

The standardization should be used by many new CLOs as analysts expect a positive impact on the secondary market to follow shortly as a result.

The due-diligence requirements would be lower versus those in the current market while valuations would also be easier to understand, the rating agency said.

Fitch added that the market has already seen some clarity in deal documents while steps to standardization have been taken.

For instance, the current documents offer more clarity in terms of specific topics such as amend-to-extend activities. This trend is likely to continue, the rating agency stated in the report.

 

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