CLO manager CIFC Corp. is tackling the impending risk retention rule head on.
The rule, which takes effect in December 2016, requires managers of collateralized loan obligations to hold 5% stakes their deals. This is a tall order for many firms that manage money on behalf of clients but have little balance sheet of their own. It has prompted a number of managers to partner with larger firms or raise money through majority-owned affiliates.
But CIFC, which is the largest U.S. manager by number of deals (30), according to Moody’s Investors Service, is raising its own capital. At the beginning of November, it issued $40 million of 10-year bonds via a private placement. Proceeds will be used to retain 5% stakes in its first deals to comply with risk retention, which will come to market sometime next year, according to Oliver Wriedt, the firms’ co-president.
Sandler O’Neill + Partners was the lead manager on the offering, which is rated ‘BB-‘ by Standard & Poor's.
Another distinction CIFC enjoys is that it has been able to take its time complying with risk retention, rather than rush to demonstrate to investors that it has the ability.
“Unlike a number of other CLO management platforms, the market has not required us to issue risk retention compliant deals,” Wriedt said in a phone interview with Leveraged Finance News. “That notwithstanding, we fully expect to begin to issue compliant deals next year. Regulation does not take effect until December 2016, but investors have been insisting on certain platforms becoming compliant throughout the year.”
Wriedt said CIFC opted to issue junk bonds because it felt it was a good time to grow its high yield investor base and gain name recognition in the market.
“As we evaluated our choices to raise capital going forward, we felt it would be a good time to begin a dialogue with investors who buy private placements,” he said.
That initial $40 million will only go so far; so far this year, CIFC has priced five CLOs for a total of $2.6 billion, none of which are compliant. If it keeps up that pace next year, and all of the deals are compliant, it would need to raise over $100 million. However, Wriedt said the firm has the resources in place to finance risk retention and has already been looking at its options.
As of Sept. 30, CIFC’s assets under management in CLOs and othe r loan-based products was $14.2 billion, up from $13.3 billion one year prior.
Aside from the $12.4 billion of CLO notes consolidated on its balance sheet, CIFC’s only other long-term debt consists of $120 million of junior subordinated notes maturing in October 2035. These notes were originally issued by Deerfield Capital Corp., which CIFC acquired in 2011.
Other managers, even some large ones, are taking different approaches to financing risk retention. Last month, for example, insurance asset manager Conning announced plans to acquire Octagon Credit Investors, which oversees $12.8 billion in CLOs, bank loans and high yield bonds. In a Oct. 5 statement, Octagon CEO Andy Gordon said the deal will provide Octagon with additional capital to meet regulatory risk retention requirements.
Also last month, Marathon Asset Management raised a $200 million fund which it will use finance ownership of the equity tranche of its CLOs, according to Bloomberg reports.
“Our senior unsecured bond represents a different risk profile than conventional vertical strip risk retention financing,” Wriedt said. “We may be the only CLO issuer in the market today raising capital in this format.”
