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The big theme of Q2 was the huge outpouring of CLO issuance in the year, with 328 CLO mandates fulfilled for law firms. This created opportunities for updating docs, investor pushbacks on a range of topics, and stips that stick to specific investors.

In the US BSL CLO market in particular, the focus was on repricings, as 63.7% of transactions took the form of a refinancing or reset, up from 50% in the first half of the year.

Find below our league tables outlining the most active law firms across the manager counsel and arranger counsel sides in the US BSL, US MM and European CLO markets, as well as market commentary from leading lawyers covering the key themes.

Paul Hastings remained the most active in the US BSL CLO market in the role of arranger counsel having worked on a massive 187 transactions year to date, although its overall market share slipped slightly from 48.44% to 47.17%.

The only change in the top three involved a rebrand as Allen & Overy and Shearman Sterling completed a merger to become A&O Shearman.

On the manager counsel side, the top three remained Milbank, Dechert and Schulte, although Latham & Watkins is in third position globally.

In the middle-market space, Cleary Gottlieb became only the fourth firm in our rankings to score a credit as an arranger counsel.

Among manager counsels, Dechert retained top spot, but slipped in market share from 41.6% to 25.6%, having worked on four deals in the quarter, compared to 10 in Q1.

In Europe, Paul Hastings has worked on the most arranger counsel mandates year to date, although Cadwalader in second spot is close behind, with a 31.84% market share compared to Paul Hastings’ 34.18%.

Milbank remains the most prolific firm advising CLO managers in Europe, but Paul Hastings is only narrowly behind on volume, and has actually worked on one more mandate year to date.

A complete download of all league tables in Excel format is available here.

Anchor triple-A CLO investors like to create bespoke stipulations for their deals, but this can present CLO liquidity issues.

Alex Collins, UK partner at Cadwalader, says the firm is starting to see more stips tied directly to anchor CLO triple-A investors.

“Sometimes you get a triple-A anchor investor that has a certain stipulation that maybe others wouldn’t need,” said Collins.

“We’ve seen more managers tie particular stips to that investor, a 'day one class A holder'. Those stips will apply so long as they hold a majority of the class A notes and to the extent that is no longer the case or the investor isn’t in the deal, those stips can fall away.”

Dan Tobias, partner at Cadwalader, adds sometimes this will mean more restrictions on aspects like workout criteria or consent on modifications and waivers beyond what other investors would typically require.

For example, there may be a triple-A consent on a modification of a term that otherwise might have been passed through by trustee consent and rating agency confirmation.

The heavy flow of CLOs has been one of the main themes of the quarter, with resets dominating in the US.

“We’re seeing some clients resetting practically every one of their deals,” said Craig Stein, US partner at Schulte, “as no matter what the vintage, the spreads in those deals are wider than the market today.”

For the first time we’re also seeing a number of deals outside of reinvestment being reset.

“One thing we’re seeing on resets of older vintages is in some situations managers are warehousing assets to use in the reset to increase par, either to compensate for amortisation or to upsize the deal,” said Eugene Ferrer, US partner at Paul Hastings.

Despite the frenetic pace of issuance, $121bn of all types of CLOs were issued in the US and €18.2bn in Europe, law firms are still seeing lots of investor stips come in, which is in some ways a healthy sign, and shows investor sophistication, says Martin Sharkey, UK partner at Schulte.

“Pushbacks we’re seeing are on reinvestment criteria, maturity amendments, and the ability to acquire loss mitigation loans (LMLs), up-tiered assets and privately rated assets,” said Sharkey.

LMLs in particular are a focus in the US. “How LMLs are treated in the indenture is still extremely important for managers and equity,” said Stein, “as we’re starting to see less actual bankruptcy filings and more out of court workouts and restructurings, so it’s important for managers to be able to participate.”

9fin’s monthly report on downgrades has demonstrated the far larger amount of restructurings or distressed exchanges compared to Chapter 11 filings. Last month there was four of the former and one Chapter 11 filing, and in May there was seven restructurings and no bankruptcy filings.

Updated treatment for LMLs in indentures is one of a number of ways that managers are using resets to update docs. “For some of these older resets, the manager is often focused on updating document terms to more recent market terms,” said Ferrer. ”In the case of say 2018 vintage CLOs, it can be significantly different to newer deals.”

The CLO market is often preoccupied with potential regulatory challenges. However, regulation should move to a more favourable environment. The mood music from EU regulators seems to be that they’re open to reducing the burden, said Sharkey. “The bigger risk for the CLO market is geo-political shocks, like Covid or Ukraine.”

Although the quarter was quiet on the regulatory front, the International Organization of Securities Commissions (IOSCO) published a report on 3 June, outlining “Good Practices for Consideration” for leveraged loans and CLOs.

Collins says while the IOSCO report is probably helpful for market participants generally, the report acknowledges that a lot of the recommendations on the CLO side are already being done.

In Europe, in particular, the disclosure aspect of the report stands out, Collins says. “Where there is a reporting regime that exists, such as transparency reporting UK/EU securitisation regulation, there was an acknowledgement that what they have recommended is likely covered,” said Collins, “Not just by the trustee reports, but also those transparency reports.”

In addition, it was acknowledged in the report that it's helpful for investors to have open dialogue with CLO managers.

Tobias says another aspect of the report related to investors being encouraged to better understand a manager’s strategy around valuations and distressed asset situations. However investor-manager dialogue also happens organically, whether it's before the transaction or during the life cycle.

The LSTA also published a response to IOSCO’s final report here.

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