LevFin Insights Quotes Liz Osborne and Dasha Sobornova on CLOs in Debt Restructurings

For the article “EMEA Insight: CLOs’ ability to follow their money gives them a stronger hand in debt restructurings – if they choose to play it,” LevFin Insights quoted Akin financial restructuring partner Liz Osborne and securitisation partner Dasha Sobornova. The article considers how Europe’s collateralized loan obligations (CLOs) are poised to play a much more active role in debt restructurings than in previous cycles, due to new provisions (namely loss mitigation obligations (LMO)) that enable them to put fresh capital into troubled businesses.

On whether European CLO managers would want to lend money to troubled borrowers, even if they are now permitted to do so, Liz clarified that “CLOs are not natural providers of new money, and being on a [steering committee] in a big restructuring can be a heavy lift from a time and resource perspective.”

“CLOs have multiple positions and there will come a point when the [restructuring] market gets busier and they simply don’t have the bandwidth to be driving multiple restructurings. The premise of a CLO is to have a portfolio of performing loans, so something has gone quite wrong if they are managing a portfolio of workouts – it’s not their happy space,” she continued.

How best to participate in a debt restructuring is a problem that can be most acute for CLOs that are outside their reinvestment period. On this, Dasha said, “It’s less likely that these deals would be able to participate in new-money tranches unless you have the LMO flexibility.”

She added, “To some extent, a manager of pre-COVID issued deals is prisoner to the performance of the assets once the CLO has left its reinvestment period – and they’re potentially being restructured with them watching on the side lines.”