HPS Investment Partners is refinancing a $400 million collateralized loan obligation it originally issued in 2016, and printing an additional $100 million of notes in the process.

At the closing of the transaction, HPS Loan Management 8-2016 (formerly Highbridge Loan Management 8-2016) will have a new target par of $505 million, up from the original $400 million, according to presale reports from S&P Global Ratings and Fitch Ratings.

The additional notes are not being distributed proportionally across the capital stack, however. The refinancing will result in slightly higher subordination for the senior, triple-A- rated Class A notes. This increased credit enhancement is coming almost entirely from an increase in the equity, or most riskiest (and unrated) tranche of securities in the transaction. This will offset a reduction in the A rated (by Fitch) Class B notes.

Other tranches in the capital stack are also being upsized, but in smaller proportion to their original size than either the Class A notes or the equity.

The largest increase is in the Class A notes. The original A1 tranche will be upsized to $292.5 million from $248 million, while a $32.5 million of Class A2 notes (rated AAA by Fitch alone) is being added. The ratings reports parted on the projected new coupon rates for the A1 notes, which originally sold at 155 basis points over Libor. S&P based its analysis on a new coupon spread of 102 basis points, while Fitch modeled an interest rate of 108 basis points plus Libor.

The deal has not yet priced, according to Thomson Reuters LPC. It is expected to close July 20 via arranger Goldman Sachs.

The original split Class B tranches of fixed- ($20 million) and floating-rate ($36 million) notes are being combined into one downsized tranche of $55 million.

The Class C tranche is being upsized to $30 million, up from $24 million, the Class D tranche to $30 million from $20 million, and the double-B-rated Class E tranche to $18.75 million from $18 million.

And the equity tranche is increasing to $47.3 million from the original $37.5 million.

The net result of all of these changes, plus the elimination of a $3 million Class X interest-only tranche, is a slight increase in subordination available to the senior notes to 43.9% from 38.6%.

The presale reports do not indicate how much of the equity will be retained by HPS. The original deal did not comply with risk retention rules requiring managers to keep 5% of the economic risk in their deals, and CLOs like this one that acquire all of their collateral in the open market no longer have to comply with skin-in-the-game rules.

In fact, a number of CLO managers are unloading their equity in deals issued while the rules were in effect.

HPS executives could not be reached for comment.

The refinancing and extension will push a new five-year reinvestment period through July 2023 and lengthen the noncall period until July 2020. The eight-year weighted average life test was extended to 2027, according to S&P.

The deal’s changes have resulted in a “minimal cushion” under cash flow analysis tests for the Class A1 and Class E replacement notes, but the refinancing and extension provided relief in weighted average spread and recovery rate stresses, according to S&P.

HPS Investment Partners has 10 U.S. CLOs under management totaling $42.4 billion in assets, and last month launched its first 2018 primary-issue transaction (the $510.6 million HPS Loan Management 12-2018), which is expected to close June 28. HPS also manages two European CLOs sized at a combined $1.8 billion.

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