Maples Group - The CLOser - May 2021

AN INDUSTRY NEWSLETTER FOR THE GLOBAL CLO MARKET MAY 2021

LIBOR Discontinuation Impact on CLOs

ESG Investing A Vehicle for Change Industry Focus Infrastructure and Project Financing CLOs

Your Maples Group global CLO team provides Cayman Islands and Irish legal advice and CLO issuer / co-issuer and fiduciary services in the Cayman Islands, Delaware, Dublin, Jersey, London and the Netherlands.

This edition of The CLOser includes1:

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US and European CLO Market Reviews LISTed – A Global Listings Update The Impact of LIBOR's Discontinuation on CLOs and Securitisations Infrastructure and Project Financing CLOs ESG Investing – A Vehicle for Change Your Global CLO Team – A CLOser Look

Data in this publication is derived from a variety of sources, including the Maples Group, Structured Credit Investor, LCD, Leveraged Loan, Creditflux, Moody's, S&P, Fitch, Euronext Dublin and Central Bank of Ireland.

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What's Inside

The Maples Group is delighted to present our May 2021 edition of The CLOser.

In this edition: •

We feature ESG as a vehicle for change and bring you our second 'Bringing You CLOser…' article with an inside view from a recognised CLO industry expert. In this edition we hear an industry perspective on ESG from Gina Hubbell, who has been in the financial services industry since the mid-1980s, primarily in the fixed income market.

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We take a look at latest trends in global listings in our inaugural edition of LISTed.

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We consider the impact of LIBOR's discontinuation on CLOs and securitisations.

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We reflect upon infrastructure and project financing CLOs.

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AND…

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We get to know Úna McLaughlin, Associate, in Maples and Calder's Dublin office and Nicolas Rogivue, Senior Vice President, in Maples Fiduciary's Cayman Islands office.

We very much hope that you enjoy this edition and find the content engaging and informative.

Stay safe and best wishes from the Maples Group CLO Team.

2 | The CLOser

US CLO Market Review 2020: Proven Resilience Although 2020 was, without doubt, an unprecedentedly challenging and volatile year for the global credit markets, as early as the end of Q2 there were already some tangible signs of the anticipated resilience of US CLOs beginning to emerge.

Preliminary results from our analysis of 70+ open warehouses, which the Maples Group published in mid-June, attracted significant press attention and provided one of the first quantitative assessments of the impacts of COVID-19 on warehouse stability and performance. At that point, although 25% of deals were indeed symptomatic, swift remedial actions mitigated the risks of default with the result that, by September, when we published our updated data in the last edition of The CLOser, only around 5% of deals subject of our study had terminated. Reassuringly still, a significant number of deals that had been struggling went on to successfully price and issue, with other deals perhaps seeing their assets 'split', to separate the good from the bad, and new vehicles being formed for these purposes resulting in shorter warehouse periods and rapid price-toclose timeframes, often with smaller overall CLO deal sizes. That adaptability of the US CLO product to such unprecedented market adversity is one key aspect of 2020's experience that has contributed significantly to bolster investor confidence and, to a degree, has supported the current increased levels of activity never seen before that we are now observing in 2021.

We summarise below some additional trends, developments and impacts noted by the Maples CLO team through 2020: •

Rating downgrades: Rating agencies were swift to place large numbers of CLO tranches on watch for potential downgrades in late Q1 to Q2. By Q3, Moody's, S&P and Fitch downgraded, cumulatively, around 600 CLOs, although this was notably lower than feared.

Moody's took steps to make certain changes to its CLO rating methodologies resulting in multiple indenture amendments to incorporate such changes.

•

Tax blocker formations: These peaked over the course of Q2 and Q3, with Maples forming around 40-50 during this period, many of which took assets exposed to the energy and mining sector. By Q4, however, default rates were lower and blocker formations continued to decline, aided by CLOs generally not being heavily exposed to sectors hardest hit by COVID-19.

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Liability spreads: The higher CLO liability spreads seen in 2020 gave rise to shorter reinvestment period (1-3 years) and non-call periods (one year or less) once the market became active again, resulting in optionality to reset spreads in tighter spread environments and effectively striking a compromise between interests of debt and equity investors. As a result, however, a large proportion of 2020 CLOs, particularly those that priced when liability spreads were wide and whose non-call periods are were one year or less, have either been refinanced / reset in 2021 or are likely to be before the end of 2021.

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Reduced number of active managers: It was those managers with risk retention vehicles or access to internal equity that were the primary constituents of the new issue market in 2020, which was evidenced by the number of active managers around the mid-year mark being around 60% lower than in that same period of 2019. Indeed, around 30 managers that were active in 2019 were not present in 2020.

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Repricings / partial refinancings: By mid Q3 onwards through to late 2020, Maples began to witness an increased number of partial refinancings whereby managers sought to refinance fixed-rate tranches that were expensive as compared with costs of variablerate notes due to the drop in LIBOR rates. This included splitting fixed into fixed and floating combinations.

We also witnessed repricing mechanisms engaged in an effort to reduce the spreads / rates on one or more debt tranches without incurring the substantial administrative and transactional costs of redeeming and issuing replacement tranches. Similar to the partial refinancings, these repricings involved changes to deal terms being limited strictly to those necessary to achieve the desired reduction in spreads / rates. The collateral effect of that and increased costs generally meant considerable pressure on fees for all transaction parties, including legal counsel, with substantial haircuts and write-offs as high as 50%. Refinancing activity totalled US$2.96 billion in December, being the largest monthly total since the beginning of 2020.

•

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Improving workout capabilities for CLOs: In our previous edition of The CLOser, Jake Jamison provided insight, through our first 'Bringing You CLOser…' external article from an industry expert, regarding approaches to improve workout capabilities for US CLOs. Jake noted that deal documents in 2020 reflected a new, more participatory role for CLOs in distressed corporate restructurings, with various sorts of amendments made to enhance workout participation optionality.

Volcker Rule amendment: The amendments, which became effective on 1 October 2020, provided greater clarity and certainty around the application of the Volcker Rule to CLO transactions, the effect of which was to give back to arrangers and managers the flexibility to include bonds and other non-loan assets in a CLO portfolio.

The Facts & Stats By the end of 2020, overall market activity and deal volume was very significantly up on many predictions published early in the year and even outstripped expectations by most commentators later in the year once the impacts of COVID-19 had become clearer. The result was US CLO issuance of US$93.06 billion. Although some 21% or so down on 2019, this was nonetheless an impressive outcome in a year where the world faced such uncertainty in the midst of a global pandemic.

2021 Thus Far2: Insatiable Demand Leads to Frenzied Activity This year has seen a dramatically marked and continued improvement in CLO market conditions. Tightened spreads, increased institutional demand for credit, increased liquidity, cheap funding costs, the positive effects of covenant-lite loans, confidence from the experience of 2020 and other factors have all led to a rapid and frenzied resumption of issuance composed of both new-issue transactions and refinancings / resets. In Q1, 81 new issue deals priced, totalling US$39.2 billion (as compared to 77 and US$31.7 billion in Q4 of 2020). The total issuance to date stands at over US$60.16 billion and 2021 has exceeded the same period in 2018, being the most active year on record.

Outlook For the time being, investor demand remains very strong and most commentators expect conditions, and hence volume of activity, to persist in the near term with rating agency and underwriting capacity being some of the few limiting factors that may temper the market.

Numbers are as at / around the time of publication

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2021 has exceeded the same period in 2018, being the most active year on record

The EU Securitisation Regulation (the "Regulation") was amended with effect from 9 April 2021 (see here: Regulation). The Regulation now restricts the establishment of securitisation special purpose entities ("SSPEs") in jurisdictions that are listed by the EU as 'high-risk third countries' (the "EU List") having strategic deficiencies in their anti-money laundering / counter terrorist financing regime ("AML / CFT"). As a result of the Financial Action Task Force ("FATF") adding the Cayman Islands to its list of jurisdictions under increased monitoring in the area of AML / CFT in February 2021, it is currently anticipated that the Cayman Islands will be added to the EU List by no later than October 2021.

The addition of the Cayman Islands to the EU List may have adverse consequences for relevant institutional investors under the Regulation in terms of (i) the regulatory treatment of notes issued by a Cayman CLO and/or (ii) the liquidity or market value of such notes.

However, it is important to note, that investors subject to the UK Securitisation Regulation will not be impacted if the Cayman Islands is added to the EU List. The UK Securitisation Regulation restricts the establishment of SSPEs in third countries that the FATF has listed as highrisk jurisdictions subject to a call for action (referred to as the 'black list), which is different to the jurisdictions under increased monitoring list noted above (referred to as the 'grey list').

For further details, please contact:

Scott Macdonald

+1 345 814 5317 scott.macdonald@maples.com

James Reeve

+1 345 814 5129 james.reeve@maples.com

4 | The CLOser

European CLO Market Review 2020 – A Final Lookback It goes without saying that COVID-19 dominated the financial markets in 2020 and the European CLO market was no different. The pandemic initially resulted in high levels of volatility across oil prices, stock markets and corporate bond and loan yields, the immediate impact on the Euro CLO markets was the triggering of a number of warehouse drawstop events. However, the markets restarted by May / June, albeit with smaller deal sizes and shorter investment periods. As the year progressed, issuance momentum gathered pace, and by year end, the European new issuance level for 2020 was €22.11 billion from 43 deals. This was down on 2019 where the issuance level was €29.82 billion from 50 deals. Nevertheless, considering the upheaval that COVID-19 caused globally, the European CLO market still had a remarkably strong year.

Q4 2020 was also marked by the migration of nearly all existing Dutch CLO transactions to Ireland (over 70 transactions) as a result of a change to Dutch VAT rules that impacted collateral management fee arrangements. This is likely to see Ireland strengthening its dominant position even further as the issuer jurisdiction of choice for European CLO transactions.

The end of the Brexit transition period on 31 December 2020 also made its own contribution to market activity as it resulted in various transaction amendments (namely, retention cures and restructurings as well as a number of account bank and agency role migrations from London to Dublin).

Despite being somewhat overshadowed by the pandemic and the impending end of the Brexit transition period, the ESMA reporting templates issued pursuant to the EU Securitisation Regulation also get a notable mention, as these were finalised in October 2020 (some 21 months after the regulation came into effect). This resulted in a number of amendments for certain transactions in order to adopt the template reporting into their ongoing disclosure structures.

All in all, a very busy year end for the market!

2021 has so far been dominated by refinancings and resets

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2021 Thus Far As anticipated, the lack of favourable conditions since late 2018 to early 2020 coupled with the shorter deal trend in 2020 noted above, 2021 has so far been dominated by refinancings and resets, which continue to be initiated and issued at a frenetic pace. At the time of publication, the issuance level for refinancings is €9.44 billion made up of 30 deals and the reset issuance level is €12.79 billion made up of 30 deals. In addition to the resets and refinancings, the new issuance of CLOs in Europe continues on as strong levels, with €8.36 billion of new issuances so far in 2021 across 21 deals. Managers across the spectrum have also opened new warehouses. There are also numerous new managers yet to debut, as well as some consolidation in the manager market occurring too, while new arranger teams are also emerging.

Given the total population of reset eligible deals, including across the range of vintages, we have seen a significant variety of approach. For example, resets of 2021 vintages have involved significant upsizes, including the issuance of new subordinated notes, while some older vintages have refinanced one or two classes of notes only. In the context of upsizing transactions, we have also seen the use of sidecar or reset warehouses becoming prevalent for the first time in Europe.

A further recent trend in European CLOs adopted from the US market is the introduction of loan note tranches. Some features of these tranches include: (a) the ability for the lenders to convert or exchange the loan into notes; and (b) the listing of an 'up to' amount on the notes so that if the lenders choose to convert the loan into notes, the converted notes automatically can access the quoted Eurobond exemption for tax purposes.

As discussed elsewhere in this edition, ESG garnered increasing focus particularly as the EU's Sustainable Finance Disclosure Regulation ("SFDR") went live in March 2021 in respect of CLOs managed by EU-based MiFID managers. We understand UK managers remain out of scope as UK SFDR has yet to be implemented, though for

some managers, global SFDR projects implemented across all of their fund products has meant SFDR language has also been adopted in their CLOs. In January 2021, reporting also went live for SPVs party to transactions subject to the EU's and the UK's Securities Financing Transactions Regulation ("SFTR"). In the CLO context, this is relevant to certain risk retention finance products and there is some nuance to be worked out also in respect of Brexit and the SFTR classifications of the parties to the financing, as to which regimes apply and what compliance is required.

2021 – Looking Ahead For the year ahead, it is suspected that there will be a steady stream of refinancings and resets, as well as the usual CLO issuances. Morgan Stanley has raised its European CLO issuance forecast for this year to €15 billion, from €10 billion. Nomura has revised its forecast for European CLO refinancings to €65 billion, up from roughly €40 billion.

For further details, please contact:

Stephen McLoughlin

+353 1 619 2736 stephen.mcloughlin@maples.com

Callaghan Kennedy

+353 1 619 2716 callaghan.kennedy@maples.com

6 | The CLOser

LISTed – A Global Listings Update LISTed is the Maples Group's industry newsletter from the global listings team. The Group's global listings team is an acknowledged leader in listing services with specialist teams based in its Cayman Islands, Dublin, Hong Kong, Jersey, London and Luxembourg offices.

Click here to view the April 2021 edition.

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8 | The CLOser

The Impact of LIBOR's Discontinuation on CLOs and Securitisations

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As almost all current CLOs and securitisations incorporate LIBOR as a base reference rate, the impending discontinuation of LIBOR has led to the inclusion of fallback language in deal documents as recommended by the Alternative Reference Rates Committee ("ARRC"). Over the years, much work has been done to ensure that such language is robust enough to deal with the upcoming event.

Historically, most of the deals that we worked on attempted to include some sort of fallback language. However, the lack of any recognised alternative rate made such language likely to result in undesirable outcomes for most deal participants if ever implemented.

Recognising the impending problem, ARRC initially focused on LIBOR transition and fallback language within LIBORbased derivative contracts and by May 2019, it was able to provide more robust fallback language specifically tailored for LIBOR-based securitisations.

Shortly after ARRC's initial guidance, Maples began an analysis of the fallback language that was included in its client portfolio of new CLO issuances and refinancings.

Our analysis revealed that three distinct methods had emerged as follows: 1) The "Supplemental Method" sees the inclusion of specific fallback trigger events as well as mechanisms for negotiating a new reference rate. We have seen a few variations of the Supplemental Method, with either investor consent being used to determine the replacement rate or investor consent not being needed at all, with the manager in its sole discretion selecting the replacement rate (either from pre-set criteria or otherwise). In our observations, the Supplemental Method largely defers all decisions about the actual successor rate and associated adjustments to the future.

2) The "Hardwired Method" includes clear and observable triggers as well as defined successor rates and spread adjustments. The Hardwired Method usually, but not always, incorporates a fallback 'waterfall' of reference rates and provides for a limited array of prioritised options without need for any investor consent (and typically includes definitions of various tenors and iterations of SOFR as a successor rate) which automatically fall into place on the occurrence of certain triggers and events. In deals where we have seen hardwiring but without a waterfall, we have seen SOFR selected as a replacement rate, with further fallback if SOFR is discontinued prior to such transition. In this situation, the question of the replacement rate is usually then handed back to the manager, with a final decision on the replacement rate made with investor consent.

3) The "Hybrid Method" can best be described as a mix of the previous two methods. Usually, the Hybrid Method sees the inclusion of hardwired fallback language in the form of a waterfall that is able to be implemented without investor consent. However this fallback waterfall does not automatically fall into place upon a set trigger or event (as we see on the Hardwired Method). Instead, the discretion of the manager is maintained by allowing the manager to choose and implement an alternative reference rate, usually on the condition that consent from investors is obtained (often the controlling class and equity). In this way, the Hybrid Method provides flexibility for the manager to address value transfer for investors and reduce basis risk concerns.

Maples' Observations Our analysis of the deal documents underpinning a sample of 100 randomly selected new issuance CLO deals between 1 January 2020 and 31 March 2021 and 60 randomly selected refinancing deals between 30 June 2019 and 28 February 2021 identified clear trends in response to the above-described fallback language recommendations and iterations.

Fallback Language in New Deals between 1 January 2020 and 31 March 2021: Supplemental Method 8* Hardwired Method 31** Hybrid Method 61** 100 The above sample of new deals included 45 collateral managers and 15 law firms acting as US counsel to the Issuer.

* Almost all deals occurred in the first half of 2020 ** Mix of iterations with some waterfalls being conditional on a majority of the underlying portfolio adopting a similar reference rate

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Fallback Language in Refinanced Deals between 30 June 2019 and 28 February 2021: Supplemental Method 19* Hardwired Method 10 Hybrid Method 31 60

* A large majority of these deals occurred shortly after May 2019 and before the ARRC endorsement of the Hardwired fallback language had taken hold in the market.

We also observed clear shifts in the methods used as time passed.

New issuance deals in early 2020 saw a smattering of the Supplemental Method. Subsequently, newer issuances tended to favour the Hardwired Method, before shifting overwhelmingly to the Hybrid Method in the second half of 2020. This trend has continued into Q1 2021.

For refinanced deals, the Supplemental Method fallback language initially saw robust industry adoption, before a quick shift to the Hardwired Method in the later part of 2019.

Interestingly, we observed that between March 2020 (the beginning of the COVID-19 lockdowns in North America) and September 2020, the inclusion of fallback language almost ceased entirely. Refinanced deals which closed after September 2020 have heavily favoured the Hybrid Method.

Legacy Contracts While newer CLOs have been able to include LIBOR fallback language either through initial deal documents at inception or via subsequent supplements, we have noted that a large number of legacy deals in our client portfolio (some dating back as far as the early 2000s) have non-existent or impractical fallbacks with little means to adequately address the cessation of LIBOR. Potentially problematic legacy CLO deals have been addressed by two market developments: •

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The extension of many USD LIBOR tenors to mid-2023 that should allow many of the tough legacy contracts to mature.

In March 2021, the New York State Legislature passed legislation proposed by the ARRC which should ensure that all legacy CLOs remaining beyond 2023 have the ARRC recommended fallback language mandated by law.

Conclusion Despite the current ARRC recommendation for hardwired fallback language, the above analysis of our portfolio indicates a clear trend towards the Hybrid Method as the fallback language of choice.

In our observation, the wide discretion offered by the Supplemental Method remains attractive as evidenced by the adoption of the Hybrid Method, but does not offer the safety nets seen in the Hybrid Method, which has led to its use nearly disappearing from the market.

Automatic adoption and implementation of hardwired replacement rates into CLO deals would undoubtedly be a desirable outcome in a market where the replacement rates are fully formed, published and widely used. However, at the time of writing, uncertainty remains with respect to potential replacement rates and given the potential for the problems of value transfer for investors and basis risk creating instability, the Hardwired Method has become less palatable for investors and managers in the last 8-10 months.

Due to the uncertainty in the market and given the stage in the replacement cycle, the Hybrid Method provides the certainty of the Hardwired Method combined with the discretion of the Supplemental Method, and looks set to be the market leader with respect to fallback language until an industry standard replacement rate becomes widely adopted within the broader loan market.

For further details, please contact:

Jonathan Brown

+1 345 814 5620 jonathan.brown@maples.com

Mark Mugglestone

+1 345 814 5894 mark.mugglestone@maples.com

Samuel Kuria

+1 345 814 5840 samuel.kuria@maples.com

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Infrastructure and Project Financing CLOs In recent months, we have experienced a sharp uptick in clients exploring the use of CLO structuring with respect to infrastructure and project financing. The Maples Group acts as Cayman Islands legal counsel and fiduciary services provider to several highprofile transactions in this market, including DWS's infrastructure transactions and Starwood's recently closed STWD 2021-SIF1 transaction, and we have several other clients with deals-in-progress in this sector.

As more deals come to market that focus on this asset class, we expect demand for CLOs in this space to continue to grow. Traditional project bank lenders need to dispose of project loan assets to obtain balance sheet relief and it is expected that we will see continuing exponential growth in infrastructure development needs for a number of reasons.

The United States and other countries have committed to very significant infrastructure development plans, and there is increasing political pressure to push new sustainable infrastructure investments in a wide range of infrastructure projects, including transportation systems and energy generation, storage and distribution.

The CLO structure, which has proven its mettle in the commercial loan markets, provides a well-trodden path for non-traditional lenders to enter the project loan space.

What is a relatively illiquid class of loans can be monetised via a structure that is well-established and already wellknown and popular among investors. Regulatory and

accounting initiatives, particularly in Europe, are expected to lead to preferential treatment for green CLOs, which should further bolster strong demand for transactions backed by loans to green infrastructure projects. Traditional project bank lenders cannot fill the gap, creating a tremendous opportunity for CLOs to step in and meet the demand. We expect further deals to hit the market in the year ahead, further diversifying the range of asset classes that take advantage of the benefits offered by the CLO structure.

For further details, please contact:

John Dykstra

+1 345 814 5530 john.dykstra@maples.com

ESG Investing – A Vehicle for Change

Without question, "ESG" was one of the principal buzz words heard in 2020. Despite the challenges faced globally – or, perhaps because of such challenges – responsible investing dominated panel topics and conversations within the structured finance community, with all evidence suggesting that this trend will continue to gain momentum through 2021 and beyond.

In 2020 and thus far in 2021, we have seen over 30 offering documents and indentures (representing 17 different managers) include ESG-compliant language, as opposed to none in 2019.

Although the preoccupation with Environmental, Social, and Governance (ESG) investing (also referred to as impact investing or sustainable investing) appears to have exploded

onto the scene out of nowhere, in reality, sustainability factors have been making their way into investment criteria for the last few years.

In the CLO space, we saw the first European ESG-compliant CLO launch in 2018. Europe has since emerged as the leader in issuing ESG-compliant CLOs, with the US now building momentum.

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Historically, ESG in CLOs has involved negative screenings, i.e. not investing in certain industries and assets. Yet, the actual impact of such negative screening is often questioned, as CLOs typically already have negligible exposure to the most commonly excluded industries, such as tobacco, fossil fuels and weapons.

Given Europe's commitment to being the global leader in fighting climate change and becoming "Net-Zero by 2050", it should come as no surprise that the EU has been at the forefront of sustainable investment initiatives and regulations, and we are seeing robust ESG disclosures in EU CLO documentation due to mandated disclosure obligations which also aim to prevent “greenwashing”, i.e. the process of conveying a false impression or providing misleading

information about how a company's products are more environmentally friendly3.

Perhaps more important than regulation though, it will be the pressure of investors which likely will be the key to effect change in this area. Growing interest in the US market for positive attributes, i.e. specific ESG obligations and requirements, has led several managers to adjust their investment criteria to meet this demand.

3

https://www.investopedia.com/terms/g/greenwashing.asp

14 | The CLOser

Europe4

United States

The European Commission's Action Plan for Financing Sustainable Growth (adopted in March 2018) has triggered a number of regulatory initiatives that are intended to channel capital towards sustainable investments and provide clarity and transparency on environmental sustainability to stakeholders, thus enabling informed decision-making. Most notable of these initiatives are the adoption of the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (as defined below).

The active refinancing and reset market in the last six or so months has given several managers the opportunity to incorporate ESG criteria into their investment process and formally reflect this in their CLO documentation. Fair Oaks Capital had the distinction in March 2021 of being the first to convert a US CLO into an ESG-compliant transaction as part of a reset of AIMCO CLO, Series 2017-A, a deal managed

by Allstate Investment Management Company. Thus far, we have seen at least 27 marketed deals include some formulation of ESG compliance in their offering documents.

Some managers have stuck with the tried-and-true excluded industries, expressly excluding investment in tobacco, gambling, pornography, weapons and hazardous chemicals; while others have chosen to broaden this category to prohibit investment in activities such as the production of palm oil, the operation, management or provider of services to private prisons, the provision of predatory or payday lending activities and / or the trade in endangered or protected wildlife or wildlife products.

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainabilityrelated disclosures in the financial services sector (the "Sustainable Finance Disclosure Regulation" or "SFDR"), which became applicable as of 10 March 2021, imposes mandatory ESG disclosure obligations for financial market participants and financial advisers operating in the EU. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the "EU Taxonomy Regulation"), came into force on 12 July 2020, and establishes a unified EU classification system, or taxonomy, to provide economic actors and investors with harmonised criteria for determining whether an economic activity is environmentally-sustainable, and requires companies to disclose their alignment with activities that qualify as being environmentally-sustainable according to the taxonomy.

Central banks in Italy, the Netherlands and France have begun integrating ESG into their investment process, a process which could reduce collateral refinancing risk of ESG-compliant securitisations including CLOs, according to Moody's. The research found that central banks' increasing use of ESG in their investment process could raise demand for deals backed by credit to companies meeting ESG restrictions.

One often cited investor risk of supposed ESG-compliant CLOs is the risk of managing to the average, i.e. the purchase of low scoring assets is offset by the purchase of high scoring ESG-compliant assets. In the refinancing and reset deals we reviewed with such ESG-compliant language, generally it must be determined whether collateral is an "ESG Collateral Obligation", and in most cases the test requires that the group derive more than 50% of its revenue from a wide range of primary business activities (excluding a sub-set of the aforementioned "excluded" industries or practices).

New issue CLOs with ESG mandates are also on the rise, and a handful of managers are boldly going beyond the traditional negative screening approach. We have seen at least 15 new issue deals with ESG compliance language go to market in the past 12-month period. However, this is a nascent area, and currently there is no agreed definition of "ESG Collateral Obligation" in the legal or regulatory space

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with most managers reserving the right to determine what constitutes an "ESG Collateral Obligation"; and a marketstandard for monitoring and reporting on such practices and compliance therewith has yet to develop.

As initially reported late last year, Permira Debt Manager is looking at a new issue with a "maintain or improve" commitment built into the deal documentation, meaning that if the CLO is not meeting its minimum ESG score, the manager cannot take any actions which would lower such score further. Importantly, Permira Debt Manager specifically stated that they would not be "managing to the average".

Some managers have seen the lack of standardisation in this area as an opportunity to create their own proprietary ESG impact ratings and / or client methodologies as part of the research process for their investment portfolios. This year should also see the launch of the first CLO from Pacific & Plains Capital, a newly-founded manager with a specific focus on ESG investments and a proprietary Pacific & Plains ESG score.

distinguish themselves by adopting unique and groundbreaking ESG methodologies and approaches. Equally, there will undoubtedly be a more concerted effort towards developing a consistent and independently verifiable approach to defining, monitoring and rating such selfstyled ESG-compliant deals.

For further details, please contact:

Amanda Lazier

+1 345 814 5570 amanda.lazier@maples.com

Stacy Bodden

+1 345 814 5724 stacy.bodden@maples.com

Sheraim Mascal

+1 345 814 5892 sheraim.mascal@maples.com

The Maples View ESG investing, although not a new phenomenon in the CLO space, has moved to the collective forefront for both investors and managers alike this past year. European CLOs have led the charge here, with certain regulatory and other initiatives, such as "Net-Zero by 2050", likely pushing the ESG focus in Europe. While the US market has been somewhat slower to engage, a larger number of US managers have lately turned to incorporating express ESG-compliant criteria into their deals, in part in response to increased investor interest. A handful of managers have taken their ESG mandates even further, developing their own proprietary ESG impact scoring methodology.

While still presently in the nascent stages, over the next couple of years there will be room for managers to

4 https://www.unpri.org/sustainable-financial-system/explaining-the-euaction-plan-for-financing-sustainable-growth/3000.article

https://eur-lex.europa.eu/legal-content/EN/TXT/ PDF/?uri=CELEX:32019R2088&rid=1 https://eur-lex.europa.eu/legal-content/EN/ TXT/?uri=CELEX%3A32020R0852

16 | The CLOser

Bringing You CLOser An Industry Perspective ESG has become an increasingly important tool of the investment community. ESG guidelines provide a set of criteria for investment managers and investors to assess a potential investment in either the debt or equity of a corporate issuer. Environmental criteria consider the environmental impact of an issuer's activities. Social criteria look at the relationship between a company and its employees, business relationships and the broader communities in which it operates. Governance generally refers to a company's management structure and compensation, the breadth and scope of its reporting, employee selection and retention policies and shareholder participation. On the surface, ESG principles would seem to be an important if not necessary component of an investment manager's investment strategy and an investor's manager selection process.

However, it has long been the view of capitalists that the primary obligation of companies is to maximize profits to increase shareholder value without regard to the social or environmental consequences or what has come to be called, stakeholder value. Last year the Secretary of Labor proposed that ESG principles could not be taken into account with respect to investments being made for pension funds because to do so would violate the Employee Retirement Income Security Act (ERISA). There has been skepticism around the benefit of incorporating ESG into investment decisions or evidence that 'ESG-compliant' investments significantly improve the ESG performance of the companies in which such investments are made.

Even though stocks of companies that have high ESG scores have performed well vs market indices over the last year, some market participants are concerned that this result was driven at least in part by a concentration in tech companies such as Facebook and Google, that are currently 'in vogue' and which can more easily be seen as incorporating ESG principles in their business models but which may be overvalued as a result and more susceptible to market movements.

Gina Hubbell has been in the financial services industry since the mid-1980s, primarily in the fixed income market. Over her career she has been involved in the development of structured products including mortgage securitizations, CBOs / CLOs and collateralized borrowings and derivatives. She was most recently a Senior Managing Director at Guggenheim Partners where she had responsibility for structuring capital efficient investments for insurance and other clients.

In her capacity as lead structurer, she has been part of the development of ESG investment parameters for Guggenheim managed CLO transactions. She received her B.A. from Stanford University and her JD from Northwestern University.

Given that ESG is relatively new to the corporate world, determining whether a company meets the ESG criteria may in part be based on a company's pronouncements as to actions it will take or is in the process of taking that satisfy such criteria but which have not yet achieved any meaningful changes in such company's operations and source of profits. It may be difficult to fully understand the difference between unachievable claims and sustainable efforts. And since the 'proof is in the pudding', to the extent that a company is not successful in achieving its promises, public backlash may negatively affect both the profits and investment value of that company. Balancing the need to find a prudent level of portfolio diversity while investing in companies with high ESG scores is not easy; time itself may be the most useful tool to achieve this balance, both in terms of investment knowledge as well as the actual success / failure of a company's efforts to achieve ESG compliance.

May 2021 | 17

Put your money where your mouth is In addition, using ESG as a tool to make investments is only as good as the quality of the ESG-related information reported by the company. Currently, company management can unilaterally decide what if any social and environmental information to put in their public reports.

And what is reported may be incomplete - a company may state its compensation policies but leave out the number or racial or gender composition of employees at each compensation level.

A further element that can be problematic in institutionalizing ESG, is that there are many definitions of ESG. To be applied broadly, ESG criteria should be clear, standardized and have easy-to-understand metrics.

Environmental may be the easiest standard to define as governmental agencies have already identified and regulate many activities that have a negative impact on the environment.

One potential group with authority in the corporate and investment worlds that may take on a quasi-oversight role with respect to defining and determining ESG compliance may be the rating agencies. Each of the nationally recognized rating agencies is developing criteria to measure the level of corporate ESG compliance and a methodology to determine how a level of compliance can affect the credit quality of a corporate entity or an investment therein. Once this criteria and methodology have been formalized, investment managers and investors can apply rating analysis as a helpful tool in their own assessment of the ESG compliance of a particular investment. Given the increasing number of investors (especially in Europe) who are insisting on ESG investment compliance in rated structured investment vehicles such as CLOs, the more the rating criteria will be institutionalised and accepted by the investment community as an acceptable measure of ESG compliance and will also provide guidance to companies in determining how their level of ESG compliance may effect their rating.

With greater standardization of ESG criteria and given the size of the investment market and the ability of investment managers to target their investments within a set of guidelines, investors and their advisors have significant power to hold companies accountable for their actions and commitments or the lack thereof across ESG categories. Making companies more sustainable, inclusive and socially responsible in part through investment standards has been the stated goal of leading investment managers and investors. Heads of some of the largest investment management firms have articulated the view that capitalism should be for the benefit not only of shareholders, but of employees, customers and the community, i.e. the stakeholders.

And the investment community is exercising this power.

According to Ernst & Young in its 2020 Global Alternative Fund Strategy report, from 2019 through 2020, the percentage of investors investing in ESG products has almost doubled. Investors are evaluating and making choices based on a manager's ESG policies. Nearly all investors sensitive to ESG investing choose investment advisors, in part, based on how ESG is incorporated into their investment decision-making.

Investment managers by their selected investments and investors through their choice of investments and investment managers can be powerful tools in helping to create a more sustainable and prosperous and inclusive economy that provides for a higher level of diversity in those who can participate in the benefits of that prosperity.

Additionally, given the distrust of the younger generation of big corporations as well as capitalism itself, companies that fail to listen and adapt may experience a higher cost of capital and ultimately a decline in profitability. Investment management firms that do not adjust their strategies will lose clients and experience an outflows of funds.

What is the expression – 'put your money where your mouth is'? Making investment decisions that reflect a growing social conscience around racial, gender and social inequality and a sustainable environment can be a driving force in positive change. ESG provides a vehicle to help in the decision making process increasing the ability to make consistent and reliable decisions and thereby better ones that have a greater chance of effecting change. Any worthwhile objective involves footfalls and missteps and sometimes a backward step or two, but such occurrences do not determine the outcome and certainly not the validity of the effort. And the achievement of that objective is critical to our collective well-being.

18 | The CLOser

Your Global CLO Team – A CLOser Look Úna McLaughlin

Associate | Legal Services +353 1 619 2798 una.mclaughlin@maples.com

I joined the Maples Group in Dublin in 2015 as a trainee and qualified into the Finance Team as an associate in 2018. I advise on a wide range of capital markets and structured finance products and related issues, including CLO, RMBS and other securitisation structures, fund-linked structured products, repackagings and debt issuance programmes. My clients include arrangers, managers, investors and issuers.

What did you do before working at the Maples Group?

Identify two things you have enjoyed most about working from home over the last 12 months.

Following university, I had a year before my contract with the Maples Group began. My college roommates and I decided it was the perfect time to embark on an adventure. A few days after our final exams, we flew to Rio de Janeiro and followed the 'gringo trail', which weaves its way through South America. We visited spectacular beaches in Brazil, cycled through vineyards in Argentina, watched the sun rise on the salt flats in Bolivia, mountain biked through the Atacama Desert in Chile, took local buses across the Andes and hiked Machu Picchu in Peru.

Since starting to work from home, I have really enjoyed my new morning routine. Rather than rushing to the office in a whirlwind, balancing a large cup of coffee in hand, my start to the day has become much more relaxed, albeit still including a large cup of coffee. I begin the morning by practicing yoga and then depending on the day of the week (creature of habit), I either go for a run or tackle a home workout. I have been able to squeeze a lot more into my mornings before arriving to my desk at 9am since working from home has become the norm.

After an incredible three months in South America, we flew to Melbourne, Australia where we spent eight months working in and exploring both the city and the state of Victoria. Once our funds were replenished, we set off on a road trip down the East Coast of Australia. Our road trip took us through exquisite beaches and islands such as the Whitsundays and Magnetic Island as well as large cities and towns including Byron Bay, Brisbane and Sydney. We finished the year by flying to New Zealand and taking a hopon-hop-off tour of both islands, during which we discovered their unique beauty and met some wonderful characters.

Another great benefit of working from home is that my partner is my new 'office buddy' (though not sure he would agree!).

I always cherished that magical year and the fun we had, but it seems even more special now that I have barely left the 10km surrounding my apartment in the last thirteen months!

When not in the office or remote working, what do you like to do?

I love nothing more than going for a run by the sea to start the day, the fresh air and endorphins are unbeatable - add the sun and a coffee and it is my ideal morning. Every Saturday morning my partner and I go for a 'jog' together, which due to my highly competitive nature, ends up being an extremely serious race. It is my favourite way to start the weekend.

May 2021 | 19

I have also always adored reading. As a child, I was enthralled by the Enid Blyton and Agatha Christie books and like any true millennial worth their salt, graduated onto a Harry Potter obsession in my early teens. I have a book club with women I met while doing the Law Society professional practice course. Our book club marries the perfect combination of good books, gossip, red wine and cheese.

If you could transport yourself anywhere right now where would you go, with whom and why?

In the summer of 2019, my partner and I took a trip to California. We visited friends in San Francisco who showed us around the city and took us to a lot of amazing restaurants (including a Colombian restaurant I still dream about!). We rented an open-top jeep and drove the Californian coast stopping off to spend a few days hiking in Yosemite National Park and finishing our trip in Los Angeles.

If I could transport myself anywhere, I would go back to California and relive that holiday. I would hike in Yosemite (bringing more water than we did last time, as we grossly under estimated how much we would need!) and maybe even attempt the Half Dome. I would then spend a few days in Venice Beach sunbathing, doing yoga and rollerblading on the promenade.

Tell us two fun facts about yourself.

I really enjoy sports and despite my lack of natural athletic ability, I would give (almost) any sport a go. I have tried my hand at swimming, basketball, Gaelic football, horse riding, kayaking, Irish dancing, boxing, scuba diving and skiing to name a few. My career as a sailor was perhaps the shortest lived where at my first (and only) intervarsity sailing competition, I managed to hit a rock while racing which created a huge tear in the hull of the boat and necessitated my rescue.

Needless to say, I have never been invited to take part in the Maples Finance sailing event that occurs in Dublin every year!

When I moved out of home to go to university, my parents decided that a suitable replacement would be a Golden Retriever puppy (also) named Úna. Things got very confusing when I was accused of eating my sister's slippers and my dad tried to fill the neighbours in on "Úna's" potty training.

Úna McLaughlin

Associate | Legal Services

20 | The CLOser

Nicolas Rogivue

Senior Vice President | Fiduciary Services

May 2021 | 21

Nicolas Rogivue

Senior Vice President | Fiduciary Services +1 345 814 6111 nicolas.rogivue@maples.com

I work on a range of structured finance transactions, including a significant number of cashflow and synthetic CLOs, securitisations and note programmes in both the US and European markets.

What did you do before working at the Maples Group?

I started my career in 2002 when I qualified as a solicitor of England & Wales. I specialised in debt capital markets and worked for several law firms in the City of London until I joined Deutsche Bank AG, London Branch in 2012 where I took the challenge of switching to the business side.

Identify two things you have enjoyed most about working from home over the last 12 months.

Working from home for me effectively lasted just over three months as I was part of the first batch of people to return to our offices. That being said, I enjoyed the flexibility that working from home offers. You are more in control of your time and you can manage several things during the day. The flip side of course is there is no physical separation between work and home and so there is a risk of never switching off properly. The second upside is I live by the ocean so whenever I work from home, my "office" faces the beach; I suspect this is how most people expect we work in Cayman!

When not in the office or remote working, what do you like to do?

So many things that I could not mention!

I am a certified diver and the Cayman Islands have a lot to offer in terms of diving spots. I enjoy diving in the East End of Grand Cayman and Little Cayman in particular. I have dived in many places around the world and Cayman is on the top ten list. I am hoping to find the time at some point to do my PADI Dive Master.

Being French, I will stick to the cliché and say that I enjoy food and cooking. Since I have been in Cayman, I have tried to create some new recipes and incorporate Caribbean style cooking into my repertoire, with mixed results – no four-star dining experiences so far but I keep trying!

If you could transport yourself anywhere right now where would you go, with whom and why?

The African savannah and Kgalagadi in Botswana in particular. When I lived in London, I would go every year to Southern Africa. I own a camper Land Cruiser there and so I would "disappear" in the African bush for two to three weeks with no phone or internet and camp where I chose.

The absolute freedom, the complete lack of connection with the outside world, the breathtaking landscapes and the very close proximity (too close sometimes) to the wildlife is what makes me tick. I would go on my own as the conditions are too harsh and I do not know many people who would enjoy camping in the wild near a pride of lions!

Tell us two fun facts about yourself.

I am a qualified game ranger. I happened to be on gardening leave years ago and so I seized the opportunity to go to South Africa and take the course to become a ranger. I then worked for a few game reserves / national parks in Africa where I was mostly in charge of tracking game and driving tourists around. It was quite an exciting experience and I enjoyed telling people about animals and giving them the chance to take some great photos.

I am a classic and sports cars enthusiast. I started to buy old classic cars with my first pay checks and restore them to their former glory, so I accumulated quite a few interesting vintage examples over the years. That being said, my favourite car was probably my first, an old battered rusty Mini 850. It served me well, until it tried to kill me after I slammed on the brakes ... while the wheels and chassis stopped, the body (with me in it) kept going down the road.

A Global Team Our CLO team comprises 26 specialist CLO lawyers and 48 specialist CLO fiduciary professionals across our global network. Since the inception of the CLO market over 20 years ago, we have provided our clients with the benefit of our unparalleled depth of knowledge, experience and insight into what we see across the whole structured finance market, from the latest warehousing structures, to the latest regulatory developments and how they impact CLOs, to ongoing post-closing CLO issues.

For further information, please speak with your usual Maples Group contact, or the following primary CLO contacts:

Legal Services

Fiduciary Services

Cayman Islands

Dublin

Cayman Islands

Scott Macdonald +1 345 814 5317 scott.macdonald@maples.com

Stephen McLoughlin +353 1 619 2736 stephen.mcloughlin@maples.com

Guy Major +1 345 814 5818 guy.major@maples.com

James Reeve +1 345 814 5129 james.reeve@maples.com

Callaghan Kennedy +353 1 619 2716 callaghan.kennedy@maples.com

Andrew Dean +1 345 814 5710 andrew.dean@maples.com

John Dykstra +1 345 814 5530 john.dykstra@maples.com

Andrew Quinn +353 1 619 2038 andrew.quinn@maples.com

Delaware

Tina Meigh +1 345 814 5242 tina.meigh@maples.com

Hong Kong / Singapore

Jonathon Meloy +1 345 814 5412 jonathon.meloy@maples.com Anthony Philp +1 345 814 5547 anthony.philp@maples.com Amanda Lazier +1 345 814 5570 amanda.lazier@maples.com

Michael Gagie +65 6922 8402 michael.gagie@maples.com

James Lawler +1 302 340 9985 james.lawler@maples.com Dublin Stephen O’Donnell +353 1 697 3244 stephen.odonnell@maples.com

Jersey

Jersey

Chris Byrne +44 1534 495 311 chris.byrne@maples.com

Cleveland Stewart +44 1534 671 370 cleveland.stewart@maples.com

London

London

Jonathan Caulton +44 20 7466 1612 jonathan.caulton@maples.com

Sam Ellis +44 20 7466 1645 sam.ellis@maples.com Netherlands Allard Elema +31 203 998 233 allard.elema@maples.com

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