On Monday, a wave of expected refinancings in collateralized loan obligations deals appeared to crest with 13 existing CLO deals assigned new post-refinancing ratings by Moody’s Investors and Standard & Poor’s.
The refinancings are coming “fast and furious,” said an official with the Loan Syndications and Trading Association, based on the anticipated deadline of forthcoming risk-retention guidelines effective for CLOs after Dec. 24.
There were $9 billion in 16 refi’s and reset deals through the end of the third quarter ($6.8 billion in the third quarter alone), but up to $50 billion may be up for refinancings this quarter as they exit their call protection windows and managers rush to beat the deadline.
That level of potential refinancings could be challenging for the market in terms of the available inventory of new loans to replenish portfolios or the pool of investors to attract, especially with the market’s anticipation of a surge in year-end primary CLO deal issuance.
“We’ve been seeing refis and resets for awhile, and they’re certainly coming fast and furious now,” said Meredith Coffey, executive vice president of the LSTA. With the Dec. 24 deadline looming, “you have to have your CLO closed by then, so you’ll probably see refinancings, resets and new CLOs all trying to get done two or three weeks beforehand so there’s time to close.”
The risk-retention standards will require CLO managers to retain a minimum 5% stake in the notional value of newly issued CLO securities. While a "no-action" letter from July 2015 by the Securities and Exchange Commission clarified a refinancing would not trigger the rules on exempt CLOs, the exemption would only remain in place if the refinanced CLO maintained nearly all its existing terms and conditions, sans the lower interest rate.
Refinancing or resetting maturity and call/reinvestment periods before the deadline ensures managers won't have to risk the uncertainty that they would meet the SEC's requirements for continued exemption.
Among the transactions with new ratings Monday were deals exiting a four-year reinvestment period under Carlyle Global Management (Carlyle Global Market Strategies CLO 2012-4) and Prudential Financial Management (Dryden XXV Senior Loan Fund). Deals receiving reset and maturity extensions are also dashing for the finish line, such as ones from Credit Suisse (Madison Park Funding X from 2012) and Canyon Capital Advisors (Canyon Capital CLO 2012-1).
S&P on Monday finalized ratings on an optional redemption and replacement note issuance for Magnetite VII, a CLO originally issued in December 2012 by BlackRock. Like other reset deals of note this year, BlackRock primarily gained from an extension of the reinvestment period (to January 2019) and to the noncall period (to January 2018) and garnered little, if any benefits, from coupon rates on the five classes of notes. The interest rate on $372 million in AAA-rated Class A-1-R notes, for instance tightened from slightly to 135 basis points over Libor from 137 basis points from the older notes.
PineBridge Investments this week completed a refinancing of the $414.9 Galaxy XVII CLO issued in 2014, receiving ‘AAA’ ratings from S&P on three classes of replacement ‘A’ notes , as did a $514.33 million notes replacement transaction by THL Credit Senior Loan Strategies for its THL Credit Wind River 2012-1 CLO. Carlson Capital’s Cathedral Lake 2013 CLO (sized at $582.8 million) also closed on a refinancing this week with new replacement notes.
Other refinanced deals closing or assigned new post-refinancing ratings this week were BNPP IP CLO 2014-II, a $282.9 million deal managed by BNP Paribas Asset Management; $374 million in replacement notes for the 2013-vintage Venture XV CLO from MJX Asset Management; Crescent Capital Group’s Atlas Senior Loan Fund V originally sized in 2014 at $459.5 million; the $1.16 billion California Street CLO IX (formerly Symphony CLO IX) from Symphony Asset Management. CIFC Funding 2014-V through CIFC Asset Management also had a refinancing.
All of the deals, with the exception of CIFC Funding 2014-V, were issued new ratings by S&P; Moody’s rated CIFC as well as Dryden, Canyon Capital, Atlas Senior Loan Fund, Venture XV and THL.
In a fourth-quarter outlook published in September, Wells Fargo noted expectations of a surge in primary new CLO deal issuance in the fourth quarter, in larger and upsized deals, to “make up” for low issuance levels to date in the market. (According to the 4Q report, 69% of large managers who had three or more deals in 2016 have issued fewer than two deals, and 48% of managers with two or more 2015 deals have only have only one or zero deals so far this year).