Ares Management and Alcentra NY have turned to a trending workaround allowing the firms to reset a pair of actively managed collateralized loan obligations that were otherwise ineligible for refinancing or changes in deal terms.
According to ratings agency presale reports published Friday, Ares and Alcentra are issuing new CLOs that will receive the collateral transferred from existing deals that can no longer be amended or altered, due to special regulatory conditions under which the older deals were refinanced last year to retain a risk-retention exemption.
Ares is issuing replacement notes through Ares CLO XXXII-R for its $516.9 million Ares CLO XXXII deal originally issued in 2014, and refinanced in February 2017.
Alcentra NY, the U.S. boutique issuer for BNY Mellon-affiliate asset management firm Alcentra, is doing the same with the $425.9 million Shackleton 2013-IV CLO, which was refinanced previously in April 2017 and will now have its collateral shifted to Shackleton 2013-IV-R CLO.
By repackaging the collateral in new trusts, the changeover allows Ares and Alcentra to essentially regain the ability to extend reinvestment periods and maturities and remove the restrictions on further refinancings to the old deals. Additional changes to the deals were disallowed after the managers conducted a limited, one-time repricing of the notes last year following the end of each deal's reinvestment period.
By only changing the coupon on the portfolio notes, Ares and Alcentra in 2017 did not trigger risk-retention requirements on the refinanced notes based on the guidance of a July 2015 no action letter the Securities and Exchange Commission. Managers could reprice notes to a lower coupon, but were otherwise restricted from altering the deal's maturity, reinvestment or noncall periods.
CLOs issued prior to 2016 were grandfathered from the risk-retention rules that the SEC and the Federal Reserve Board of Governors began enforcing in December 2016.
The deals eligible for the limited refinancing were considered a key driver behind a record $165 billion wave of refinanced and reset CLO deals in 2017.
Ares and Alcentra are printing the new deals just as the risk-retention rules that prompted the 2016-17 refi are expected to be null and void by Monday, stemming from a federal court ruling. Even as the rules dissipate, many of the one-time refis have restraints baked into the deal documentation against future activity.
In many instances, overlooked legal wording in documents forbid the deal from a second refinancing again whether or not risk retention is in effect, or if debt and equity investors in a refinanced deal were willing to later comply with risk-retention standards.
Many managers have had to rework contract language allowing for the deals to be refinanced should risk-retention rules ultimately end.
In recent months, observers say many issuers, including Anchorage Capital and Octagon Investment Partners, have taken the replacement/reissuance route in order to unshackle the deals from the restrictions that interfered with extending a deal’s reinvestment period or weighted average life.
In those prior instances, managers had to take up skin in the game due to the issuance of new securities. But for Ares and Alcentra, both have indicated their reissue deals will only comply with U.S. risk-retention rules if they still applied at the time the deals close in April, according to presale reports.
Both firms will also be able to narrow triple-A spreads through reissuance. Alcentra is repricing the $270.7 million in triple-A notes in the Shackleton deal to 106 basis points above Libor, tightening the 2017 spread of 112 basis points. (The deal originally priced at a triple-A spread of 150 basis points.)
Ares, which manages 20 CLOs, is narrowing the triple-A paper spread to 94 basis points on Ares XXXIIR CLO from the 121 basis point spread from the refinancing a year ago, according to S&P. The original spread in 2014 was 148 basis points.
The Ares deal’s reinvestment period are being extended by 4.5 years past the original January 2018 end date, and the noncall period will be extended 3.5 years.
The replacement notes being issued through the new trusts will be initially backed by master participation agreements with the loan assets assigned to the older deals. The reissues will eventually take control of the assets as the former deals are liquidated.
Risk-retention rules were overturned by a three-judge D.C. Circuit Court of Appeals panel on Feb. 9, ruling on a 2014 lawsuit filed by the Loan Syndications & Trading Association, a trade group for the CLO and leveraged loan industry. Federal regulators failed to file an appeal to the decision by March 26, effectively putting the court’s decision in effect.
The SEC and the Federal Reserve Board of Governors are still permitted a long-shot appeal to the U.S. Supreme Court, a course considered unlikely under a presidential administration unsupportive of the regulation.
The end to risk retention is expected to boost issuance of new and refinanced CLOs.