Page 14 - MTIA Summer 2022 Market Brief
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CLO 3.0 structures offer Structural Impacts
managers enhanced flexibility The use of CLO structures is evolving, with asset managers and insurers using
compared to CLO 2.0, balance sheet CLOs and CLOs finding applications within business development
companies (BDCs) for longer-term financing. There has also been a notable shift
particularly in handling workouts
towards more loan-format liabilities versus bonds in CLO structures.
and restructurings in response
to default or restructuring As the CLO landscape evolves, market participants must navigate complexities
scenarios. Service providers such as payment processing needs, data, reporting, and regulatory requirements.
Increasingly, CLO managers require service providers that can accommodate
are being called upon to expand
needs such as complex excess calculations, virtual loan advance rates/contracts,
their operational support various asset haircuts, waterfall diversions, or unique loan investment criteria
for CLOs, although the loan reporting.
market remains largely manual.
CLO transaction documents specify all reporting requirements based on the
Achieving widespread efficiency regulatory regimes relevant to the parties involved, including EU regulations,
gains requires buy-in from all the UK’s Financial Conduct Authority (FCA), and the Securities and Exchange
market participants. Commission (SEC) in the U.S.
Working With Data Gaps
Often, the required data exceeds what CLO trustees typically and historically
provided. Trustees work with third-party reporting providers on timing,
formatting, and data fields to supply transaction- related items, including cash
and par. In addition, the reports can include loan-level data such as EBITDA
and debt coverage from other sources, including borrowers, lenders, and rating
agencies.
For broadly syndicated loans, reporting information and underlying financial
data are more widely available (see “Tech in the Balance”). In the middle market,
with the dominance of private credit, such information is not widely published.
Trustees handle overall global and portfolio-level information and data from
routine activities such as payments, purchases, sales, and notices. CLO managers
own loan-level data, such as financial statements of underlying borrowers.
Collaboration Needed
Asset Managers use a wide array of systems to track and manage their portfolios,
resulting in non-standardized data sets. These variances require CLO managers,
administrative providers, and reporting providers to collaborate and develop
reliable mechanisms for delivering the required reports using various templates.
A lot of coordination occurs to address requirements not explicitly required or
documented under the original transactional agreements.
Trustees’ ability to automate the ingestion and provision of data can help
streamline the process. Furthermore, they need the flexibility and resources to
reconcile data issues accurately and in a timely manner. Collectively, all parties
need to come together to find ways to reduce the level of effort and the need for
manual intervention in the data to deliver reports on time and at a lower cost.
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