CLO managers don't want the exit doors closed on them.
Last month, a bank consortium syndicated a $1.2 billion exit loan for Chicago-based box maker Smurfit-Stone. The deal irked several CLO managers because its structure - it was set up to be funded two months after it closed - and lack of covenants effectively kept them from participating. The deal went on to be a hit, trading up after breaking on the secondary. And now some CLO managers wonder if the Smurfit deal will set a precedent and shut CLOs out of other exit loans.
"If it happens again, it will be a big problem," one CLO manager said. "CLOs in particular had a problem with the fact that the funding wouldn't happen for two months. That's problematic for a lot of CLOs and their indentures."
Other managers echoed that concern, saying they were uncomfortable with the Smurfit loan because they would've had to sign a forward commitment, something they aren't usually allowed to do for legal and tax reasons.
They also weren't happy with the fact that the loan didn't include a material adverse change clause, a feature CLOs typically expect in a deal. Indeed, the loan was weak on covenants in general, investors say.
"The issue for Stone is that the company hadn't cleaned itself up, and the loan was covenant-lite," said a New York-based manager. "The credit wasn't that attractive."
Beyond the issues with the Smurfit deal, the low ratings generally assigned to exit loans can keep CLO managers from participating. "The rating would have to be something higher than a triple-C, because a lot of managers' triple-C buckets are already full," the CLO manager said. The Smurfit loan was not rated, but a recent $730 million exit loan for theme park operator Six Flags did receive a 'B1' rating from Moody's Investors Service.
The Smurfit deal was shopped by Bank of America, JPMorgan Securities and Deutsche Bank Securities with a coupon of Libor plus 475 basis points and a 2% Libor floor. Proceeds from the loan, which also had a two-year 101 call premium, will help the world's second-largest maker of paper boxes and packaging emerged from bankruptcy protection. The company filed for Chapter 11 protection in January 2009, citing falling customer demand and heavy debt payments.
The company was also hobbled by lower prices and revenues and a bloated inventory. Soon after it entered bankruptcy, a bank consortium led by JPMorgan and Deutsche Bank syndicated a $750 million debtor-in-possession loan for the company at Libor plus 650 bps.
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