CLO Reinvestment Rules: Why Structural Nuance Matters for Investors

CLO investors are increasingly being asked to explain and quantify the credit risk embedded in their portfolios. Softer credit fundamentals and greater dispersion in secondary performance have prompted us to revisit the mechanics of post-reinvestment. Understanding its implication has never been more important. 

CLOs Are Rule-Based — But the Rules Diverge: 

CLOs are rule-based vehicles: actively managed during the reinvestment period and amortizing thereafter. The Offering Circular sets out the governing framework — portfolio quality tests, composition limits, and refinancing mechanics. 

Once the reinvestment period ends, however, the rules diverge. Many CLOs still permit reinvestment of loan proceeds if specific credit tests are satisfied — typically under the “maintain or improve” or “strict” reinvestment frameworks. 

These provisions directly affect: 

• the speed of amortization of CLO debt tranches,
• the stability of portfolio credit quality, and
• the degree of maturity extension risk in later years.

Post-Reinvestment Risks: 

As reinvestment periods roll off, two main risks emerge: 

• declining portfolio granularity and credit quality, and
• potential maturity extensions for CLO debt tranches.

Amortization speed becomes a key factor as loan prepayments slow, and refinancing becomes more difficult — sometimes creating a “maturity wall” at the portfolio level. 

Structural and Management Discipline Matters: 

A comprehensive review of portfolio composition and quality near the end of the reinvestment period is essential to assess credit exposure and overcollateralization cushions. Beyond portfolio data, the CLO’s documentation becomes the decisive factor governing amortization dynamics. Ultimately portfolio credit risk depends on credit management discipline, where avoiding outsized exposure remains a key determinant, particularly in mitigating idiosyncratic borrower risk. 

Our review of 2025 CLO transactions lists CLOs with stricter reinvestment criteria — particularly those enforcing a “strict” or robust “maintain or improve” framework, and thus probably better positioned to preserve credit quality and mitigate maturity risk. Strict Weighted Average Life (WAL) tests in particular helps reduce the likelihood of unexpected maturity extensions. 

Our Findings: 2025 CLOs:

Across our sample of 2025 CLO transactions, we find that: 

• 70% apply a strict WARF test,
• 10% apply a strict WAL test, and
• A small number omit WARF or WAL tests entirely.

These structural differences are significant — they shape how each CLO will behave in late-stage amortization and, ultimately, how well the structure protects investors under stress. 

For detailed findings — including individual transaction data, structural comparisons, and investor implications — please contact Laurence Kubli or visit our website. 

We welcome your perspectives and questions @researchteam@thereviewport.com.