Walkers are seeing a recent resurgence in the establishment of blocker entities for US CLOs as a consequence of the current market environment and the restructuring or workout of common CLO credits.
Blocker entities are subsidiaries set up under a CLO issuer structure to hold assets, eg equity interests received in connection with a workout or restructuring of a loan, which for various reasons can no longer be held within the primary CLO vehicle.
Whilst CLO indentures contain express provision permitting the establishment of blocker subsidiaries, care must be taken when establishing a blocker to ensure that the particular requirements of an indenture are met, including:
- any notice requirements (eg to rating agencies)
- requirements for independent directors
- specific provisions to be inserted into the constituent documents for the blocker subsidiary.
In addition to establishing the blocker entity and ensuring that any indenture requirements are met, custody arrangements will need to be in place (typically with the same entity acting as custodian for the CLO) before the blocker can receive the asset.
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