CLO Warehouse Period
The warehouse period is the 3-9 month pre-issuance phase when a CLO manager accumulates loans using a temporary credit facility (warehouse line) provided by a bank or dealer. This allows managers to build portfolios gradually and opportunistically before formally pricing the CLO to investors.
How Warehousing Works
- Warehouse facility established: Manager arranges $400-600M credit line with warehouse lender (typically bank or dealer)
- Loan purchases: Manager buys 150-300 loans over 3-9 months, targeting desired portfolio composition
- Warehouse lender financing: Lender advances ~85-95% of loan purchase price; manager funds 5-15% equity
- Interest costs: Manager pays SOFR + 100-150 bps on warehouse borrowings
- Trading flexibility: Manager can buy/sell loans to optimize portfolio before CLO pricing
- CLO issuance: Once portfolio substantially complete, manager markets CLO to investors
- Warehouse payoff: CLO proceeds pay off warehouse facility at closing
Why Warehousing Exists
- Market timing: Buy loans when spreads are attractive, not forced to purchase all on single day
- Gradual accumulation: Acquiring 200+ loans simultaneously would be impossible
- Investor certainty: By pricing time, portfolio is largely assembled - investors see actual holdings
- Portfolio optimization: Manager can trade in/out before formal launch
Warehouse Costs and Risks
Costs to Equity: 3-9 months of warehouse interest (SOFR + 100-150 bps) reduces eventual equity IRRs by 50-150 bps.
Warehouse Lender Risk: During warehouse period, lender bears loan credit risk. If loans decline in value or manager fails to complete CLO, lender may face losses.
Market Risk: If CLO market dislocates during warehousing (e.g., March 2020), manager may be unable to price CLO, forcing liquidation of warehouse at losses.
Warehouse Period Timeline
- Month 0: Warehouse facility agreement signed
- Months 1-6: Gradual loan accumulation (50-80% of target portfolio)
- Month 6-7: Final loan purchases; portfolio 90%+ complete
- Month 7: Marketing begins; preliminary term sheet distributed
- Month 8: Roadshow; investor commitments; pricing
- Month 9: Legal closing; warehouse paid off; CLO launches