| NEW YORK, March 31
NEW YORK, March 31 Collateralized Loan
Obligation funds (CLOs) are adding provisions to refinancing
deals that will allow them to cut interest payments for a second
time and boost payments to equity holders if President Donald
Trump goes ahead with plans to dismantle the Dodd-Frank Act.
CVC Credit Partners and Seix Investment Advisors have
refinanced CLOs recently and added language that will allow them
to refinance again if key Dodd Frank risk-retention rules are
changed or removed, sources said.
The risk-retention rules, which require managers to hold 5%
of their funds as of last year, are partly responsible for an
anticipated 30% drop in CLO volume this year. Eliminating the
rules could boost CLO volume and provide more capital to invest
in US leveraged loans.
Cutting spreads again in a second refinancing will reduce
payments to senior debt holders and boost payments to CLO equity
holders, which could attract investors and make it easier to
sell new funds.
"If a manager and equity can take that second
refinancing, it definitely adds optionality, reduces the upfront
costs of doing a new deal and the manager starts with a fully
ramped portfolio,” said Dave Stehnacs, a portfolio manager at
The Securities and Exchange Commission (SEC) released a
no-action letter in July 2015 in response to a request from
investment firm Crescent Capital Group, which said that CLOs
issued before the risk-retention rule was established on
December 24 2014, can refinance without buying a retention
No-action letters can be issued by regulators in response to
a question about whether an activity may violate the existing
To qualify under the ‘Crescent Letter,’ a CLO refinancing
must be completed within four years of closing, the interest
rate must be lower than the original spread, the maturity cannot
change, and, crucially, a manager can only refinance a tranche
This refinancing provision can be used if the rule no longer
applies to CLOs either because of a change in interpretation, a
court case, or a Congressional or regulatory change, according
to Paul St. Lawrence, a partner at law firm Cleary Gottlieb
Steen & Hamilton.
“Once the legal regime changes, then the whole rationale for
why the no-action letter was prohibiting an additional
refinancing goes away,” he said.
Spokespeople for the SEC, Seix and CVC all declined to
Some firms are also considering adding language that allows
the same tranche of debt to be refinanced a second time if CLO
managers agree to make deals risk-retention compliant, sources
Managers will be able to keep their assets and save money if
firms use second refinancings as resets to extend maturities and
keep CLOs in place longer, but it is unclear how the SEC will
view the provisions.
It is cheaper to refinance a CLO than raise a new deal,
according to Bjarni Torfason, a CLO analyst at Deutsche Bank.
Some senior investors are pushing back against these
provisions and are agreeing to join new tranches only if an
additional refinancing is prohibited, according to Steven
Kolyer, a partner at law firm Clifford Chance.
CLO refinancing has been active recently as the funds have
to be refinanced within four years to qualify under the
‘Crescent Letter,’ which means that the window to rework 2013
and 2014 funds is closing.
About 100 US CLOs have been refinanced this year and spreads
on the most senior tranches have been cut to as little as 101bp,
according to Thomson Reuters LPC Collateral.
Deutsche Bank estimates that almost 160 CLOs that were
issued before December 24, 2014, with a reinvestment period
ending in 2017 or later have not been refinanced or reset yet
and are prime refinancing candidates with Triple A coupons of
130bp or higher.
(Reporting by Kristen Haunss; Editing by Tessa Walsh)