Bain Capital Credit is pursuing the first U.S. CLO refinancing this year that does not appear driven by risk-retention strategies.
Race Point VIII CLO, a 2013 vintage transaction, is the first of dozens of refinanced collateralized debt obligation transactions since Jan. 1 that is not being structured to meet the strict refi criteria of a so-called “Crescent” deal – a term market participants are using to describe a limited refinancing designed to maintain an older deal’s grandfathered exemption to the new risk retention standards in CLOs.
According to a presale report issued by Standard & Poor’s, the refinanced Race Point VIII includes an upsized target par amount of $700 million for original $500 million deal, plus an extension of maturity and reinvestment periods by five years. Bain is taking on higher spreads on two of the five classes of replacement notes being offered.
Such changes clearly do not follow the template outlined by a no-action letter the Securities and Exchange Commission drew up in 2015 in response to a query on the impact a refinancing would have an older CLO exempt from the retention standards.
Federal regulators in 2014 had established a Dec. 24, 2016 enforcement date for new CLOs to meet the new rule, which would require a CLO manager or sponsoring affiliate to retain a minimum 5% stake in the notional value of a CLO. CLOs structured and closed before that date would be exempt - but left unanswered was whether a commonplace refinancing of a CLO after Dec. 24 would trigger the new rules since a refi is a technical issuance of new securities.
The SEC’s letter, penned to CLO manager Crescent Capital and the firm's legal counsel, stated the agency would not enforce the rules on CLOs that refinanced after Dec. 24 so long as no structural changes were made and the issuer achieved a lower-rate coupon. Each deal would be permitted a one-time financing under those scenarios without triggering the requirements.
Since the year began, CLO managers have followed that guidance closely, issuing approximately $8.4 billion worth of refi deals with replacement notes that feature lower rates with no changes to collateral pools, its investor base or terms.
Timothy Walsh, a director of structured credit for S&P who helped rate the transaction, said the Race Point transaction was the first CLO his team had rated this year that did more than revise the liability spreads and/or coupons in a transaction.
An attorney involved in structured financing agreed the new structure would mean the Race Point transaction would likely “need to comply with the RR rules,” but might already comply if Bain owns equity stakes in the transaction.
The presale report issued by S&P does not disclose details on any particular equity or notes investment by Bain.
Bain Capital did not respond to questions about the risk-retention issues surrounding Race Point.