Can someone please explain the difference between settling at allocation post close versus cashlessly rolling your position? This is in terms of a bank debt deal that is being repriced or amended and an investor has an outstanding position in the old deal and wants to contribute to the new one.
Thank you.
I would also like to know this. I came across it in the context of CLO's extending their reinvestment period using innovative "cashless rolls".
I won't get into the legal specifics but the practical implications are pretty simple.
Rather than repay you at par in cash and allocate you a new loan at the issue price (which you pay for with cash), your loan is converted via an amendment to the credit agreement into the new loan. (any fees/premiums can be paid via gross-up or cash).
For most investors the distinction isn't that important. However, CLOs have a defined reinvestment period, afterwhich they are limited in their ability to buy new assets (proceeds go to repay the liabilities). They are also required to pass certain portfolio criteria tests during reinvestment. Some CLO collateral managers are interpreting their docs in order to allow themselves to not have to count cashless rolls as a repayment/purchase and effectively extend the life of the deal (increasing fees to themselves and usually increasing CLO equity tranche returns).
Two examples:
My CLO is out of reinvestment. Garbage Boomtime LBO Inc. wants to refinance its term loan. If they issue a new loan and repay me with proceeds, I have to take that cash and repay my AAA liabilities. If they do an amend and extend and give me a cashless roll option, I can count that as never having been repaid and extend the life of my collateral.
Second example: My CLO is in reinvestment but has breached its weighted average life test (this can happen to CLOs out of reinvestment, too). Any collateral I buy has to maintain or improve the weighted average life. Right now Garbage Boomtime LBO's term loan is 3 years from maturity; the new extended term loan is going to mature in 7 years. If they repay me in cash, I can't participate in the new loan, but if they do an amend and extend and give me a cashless roll option, I don't have to count it as a purchase and it isn't subject to my requirement to maintain-or-improve.
The exact nuances (both in the loan credit agreement and CLO indenture) are complicated and vary deal by deal.
In case it's not clear a post-close funding is the traditional refinancing flow of funds: You repay my old loan in cash with the proceeds from a new loan; I (more or less) simultaneously purchase my participation in the new loan with cash.
Got it. Excellent and thorough, thanks. Any CLO note holders taken offence to this approach yet?
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