Reinvestment Periods
Definition
The initial phase of a CLO's life (typically 4-5 years from closing) during which the manager has discretion to reinvest principal proceeds from loan repayments, sales, and prepayments into new collateral rather than using those proceeds to pay down debt tranches. After the reinvestment period ends, principal proceeds must be used to pay down debt sequentially by rating.
Why it matters
The reinvestment period is when CLO managers actively manage portfolios—trading out of deteriorating credits, capturing prepayment proceeds, and repositioning for market cycles. This distinguishes CLOs from static securitizations. The end of reinvestment period fundamentally changes CLO dynamics: managers lose ability to rotate portfolio, cash flows shift from asset purchases to debt amortization, and equity distributions may increase or decrease depending on portfolio quality. Buyers of seasoned CLO equity must understand how many years of reinvestment remain.
Technical details
Standard reinvestment period terms
Most CLOs have 4-5 year reinvestment periods from initial closing. During this period, manager can use principal proceeds (loan repayments, sales, prepayments) to purchase new loans, subject to compliance with portfolio restrictions (industry limits, rating requirements, geographic diversity). Manager typically cannot reinvest if OC/IC tests fail—proceeds must pay down debt instead. Some deals allow partial reinvestment (50% of proceeds) during non-call period to prevent manager from churning portfolio just to generate fees.
Post-reinvestment period dynamics
After reinvestment period ends, CLO enters amortization. Principal proceeds pay down debt tranches sequentially (AAA in full, then AA, then A, etc.). No new asset purchases allowed. Manager can still trade to improve credit quality, but must use cash from sales immediately to pay down debt (can't hold cash for opportunistic purchases). Portfolio naturally shrinks as loans repay. Equity distributions may increase (less debt = more residual cash flow) or decrease (if portfolio yield declining). CLOs often refinance or reset during late reinvestment period to extend manager discretion.