KKR is undertaking a rare refinancing of a 2014-vintage collateralized loan obligation that does take advantage of a one-time exemption from risk retention requirements.

The $500 million KKR CLO 9 is managed by KKR Financial Advisors II and originally closed in September 2014. On July 11, all of notes will be refinanced from the proceeds of the issuance of new secured notes, according to Fitch Ratings. The new tranche of senior, AAA-rated notes are expected to pay interest of three-month Libor plus a spread of 127 basis points.

In addition to lowering its funding costs, however, KKR is also making changes to other key provisions, according to Fitch. The new notes will have an approximately five-year reinvestment period and a two-year non-call period. Certain collateral quality tests were also extended or altered.

These additional changes trigger compliance with rules that took effect in December 2016 requiring CLO managers to keep “skin in the game” of their deals. While CLOs printed prior to that date are grandfathered, refinancing involves the issuance of new notes with lower coupons. It is possible to refinance without triggering compliance under a no-action letter issued by the Securities and Exchange Commission. But the conditions spelled out in the no-action letter preclude making any structural changes beyond a lower interest rate. And older the CLOs can only take advantage of the exception one time.

Most CLOs refinanced so far this year have been 2013 and 2014 vintage deals that qualified for the one-time exception and took advantage of it, changing only their interest rates.

Fitch’s presale report leaves no doubt that the changes to KKR CLO 9 trigger compliance, however One or more KKR affiliates will hold on the refinancing date an amount of subordinated notes representing at least 5% of the fair value of all of the notes issued by the CLO. This constitutes an “eligible horizontal residual interest.”

The transaction is not expected to comply with EU risk retention guidelines, however.

The indicative portfolio has a weighted average life (WAL) of approximately five years, while the transaction is initially covenanted to a nine-year maximum WAL that steps down with the passage of time. Fitch assumed a nine-year WAL in the Fitch stressed portfolio.

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