Neuberger Berman refinancing 3rd CLO since risk retention lifted

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Neuberger Berman Investment Advisors is refinancing its third CLO of 2018. The first two refinancings of the year, which were initiated in March, just a few days before risk-retention rules were lifted for this asset class. This time, the CLO management unit of Neuberger Berman Group is not exactly sticking its neck out.

The $412 million Neuberger Berman CLO XXII was originally printed in August 2016, before rules requiring managers to keep 5% of the economic risk in their deals took effect. No surprise, the refinancing will not give the manager any skin in the game, either.

Five classes of replacement notes will be issued at reduced spreads from the initial deal, according to presale reports from Fitch Ratings and S&P Global Ratings. The $246 million, triple-A rated Class A-1-R tranche will pay 115 basis points over three-month Libor – tightened from the 145 basis point spread on original Class A notes A $10 million Class A-2-R tranche is also being rated AAA. The remaining classes carry ratings from AA to BB- from S&P; the remaining classes are unrated by Fitch.

The refinancing will extend the life of transaction which now has a two-year noncall period and five-year reinvestment period, according to Fitch and S&P. The deal's maturity has been extended by three years, as well.

The deal was originally issued before U.S. or European risk-retention rules took effect,
Those skin-in-the-game rules written by federal regulators under Dodd-Frank Act requirements forced managers or their designated capitalized vehicle affiliates to hold a minimum 5% stake in the notional value of their deals.

(Neuberger Berman didn’t form a risk-retention vehicle, Neuberger Berman Loan Advisers, until July 2017.)

In two CLOs that Neuberger Berman refinanced earlier this year, the firm had to jump through a few hurdles over legacy risk-retention concerns. Fitch has previously reported all of Neuberger's outstanding deals issued between 2013 and 2016 were exempt from the regulations,

The firm's March refinancing of the 2016-vintage, $370.7 million Neuberger Berman CLO XXI was distinguished as being one of the first broadly syndicated U.S. CLOs this year to be refinanced without adding required risk-retention stakes following a federal circuit court ruling that overturned the regulations in February, pending an appeal.

Neuberger Berman was taking a chance – albeit with good odds – that the three-judge panel decision of the D.C. Circuit Court of Appeals rule would eventually stand, either by affirmation by the U.S. Supreme Court or apathy by U.S. financial regulators appointed by a Trump administration unsympathetic to the regulation. After the deadline for a Supreme Court appeal or en banc panel hearing passed, risk retention was formally vacated in May.

Also in March, the firm priced a second refinancing of the $375 million Neuberger Berman CLO XIX, originally issued in 2015. The manager issued of a set of lower-rate replacement notes and also amended terms to renew an expired noncall period through January 2019 and also expand the investable life of the deal by 12 months to a weighted average life of 6.5 years, according to a Fitch release in April.

The previous CLO XIX refinancing in 2017 was conducted under a limited, one-time-only repricing that the Securities and Exchange Commission permitted for CLOs under a no-action guidance letter. Under this exception, managers could lower coupon rates on deals and not trigger risk-retention requirements, so long as other term structures including noncall dates, reinvestment periods and maturities were left intact.

By issuing a new set of replacement notes this year, Neuberger Berman effectively reset its deal, opening the opportunity to affix new terms to the deal's documentation.

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