In 2017, CLO managers signed on to some restrictive terms when refinancing older deals during the industry's short-lived risk retention era.
In exchange for a grandfathered exemption from the rules that went into effect in 2016, managers could refinance pre-2015 deals under some restrictions, without triggering the requirement that managers hold a 5% stake in the notional value of their deals.
The exemption would only stand so long as lower rates were the only modifications to the original deal. Under unofficial guidance from a “no action” letter issued by the Securities and Exchange Commission, managers could not change maturities, note sizes or other deal terms.
Now, two years on, some managers may be feeling the bite from those pacts.
According to a presale report from S&P Global Ratings, Greywolf Capital Management is extending the life a 2014-vintage CLO deal through an upsized reissue in its $510.6 million Greywolf CLO IV portfolio.
The deal was previously refinanced in 2017, but the latest iteration of the deal is through a new securitization vehicle – a reissue instead of a supplemental indenture to the original transaction. By repackaging the deal, Greywolf is pricing new notes at current market prices well wide of the rates it has been paying across the capital stack since the refinancing.
For example, the Class A-1 spread for $320 million in triple-A notes in the reissued Greywolf CLO IV is 137 basis points over three-month Libor, a significant leap from the 121-basis-point spread Greywolf priced in the refinancing of the original deal two years ago.
New-deal CLO AAA spreads stood at an average 140 basis points through last week, according to Deutsche Bank.
According to an S&P, spreads are also wider for the Class A-2, Class B and Class C notes compared to the counterparty notes in the previously refinanced deal. The spread for the Class D notes (which were not previously refinanced) is also widened from the original 2014 price.
The new spreads for the A, B, and C notes are, however, inside of the original rates paid in 2014.
Greywolf appears to have had little choice but to pay up in order to lengthen the deal’s actively managed period.
Greywolf's deal was among $103 billion in CLO refinancings that the Loan Syndications & Trading Association at the time attributed to a wave of deals related to the SEC's no-action letter.
S&P's previous reports did not state whether the 2017 transaction was related to the guidance, but the addendum to that deal provided for no "substantive changes to the transaction," including its original five-year reinvestment period through January 2019.
Nor was the 2014 deal's legal final maturity scheduled for January 2027, S&P reported in a ratings announcement on July 14, 2017.
When many managers repriced notes through refinancings that protected risk-retention exemptions, the contracts included clauses restricting deals from any future changes. Many of the deals ended up being locked down, unable to void the restrictions in the event that a manager was willing to trigger risk retention in a second refinancing, or if risk-retention rules were repealed. (That occurred less than a year after Greywolf CLO IV’s refinancing, through a February 2018 D.C. Circuit Court of Appeals panel ruling.)
S&P’s presale report did not provide details on whether Greywolf was restricted from a second refinancing. However, the new transaction has added a one-year noncall and a two-year reinvestment period ending April 2021, in addition to boosting the original deal's $402.8 million size that was unchanged in the 2017 refinancing.
Greywolf, headquartered in Purchase, N.Y., has $3.16 billion in CLO assets under management, according to S&P.
