CLOs: Adding Flexibility To Engage In Liability Management Transactions

When the supply of capital outweighs demand, as has occurred recently, borrowers have leverage to help them set favourable debt terms. Additionally, fewer arrangers hold loans for their own account than in the past, and therefore they have less of a direct interest in credit document negotiations. As a result, credit terms have loosened over time, allowing distressed borrowers to raise capital on company-friendly terms.

These transactions, commonly referred to as liability management transactions, have often taken the form of "uptiering" financings and "drop down" financings. Although borrowers have engaged in these types of transactions for some time, they have occurred with greater frequency in recent years. This trend may accelerate as economies cool in the face of higher interest rates, inflationary pressures and other headwinds.