The deadline to appeal the rollback of risk-retention requirements for CLO managers expired at midnight last night, but Voya Alternative Asset Management is not taking advantage. It is refinancing a 2013-vintage transaction that was formerly grandfathered from skin-in-the-game rules - and bringing the deal into compliance in the process, according to S&P Global Ratings.
In February, a three-judge panel for the D.C. Circuit Court of Appeals ruled that the Federal Reserve Board of Governors and the Securities and Exchange Commission had overstepped their authority in apply risk retention to managers of "open market" CLOs, those that issue notes and use proceeds to acquire collateral, rather than securitizing loans on their own books.
Now that the deadline to appeal has passed, the Circuit Court is expected to mandate the District Court to vacate an earlier decision favoring the Federal Reserve and the Securities and Exchange Commission. That order to vacate should be filed with the district court within seven days, or April 2.
Voya's refinancing of the $476.3 million Voya CLO 2013-2 is unlikely to close before that date. Nevertheless, “the issuer will make the transaction U.S. risk retention compliant,” S&P's presale report states.
A presale published by S&P Monday did not indicate how Voya intends to bring the into compliance, however.
The refinancing of five of the seven classes of outstanding notes will also lower interest rates substantially. A $286.3 million AAA-rated tranche of senior notes will pay a spread of 97 basis points above Libor, down from 115 basis points originally.
Investors are also agreeing to a restart of the portfolio’s reinvestment period, which ended in April 2017; Voya can now buy and sell assets in the portfolio until 2023. And the deal cannot be called again for another two years.
Of course, Voya may have another reason for keeping skin in the game of the refinanced deal; investors in the deal may prefer the managers interest to be better aligned with theirs. In any case, the presale report does not state whether Voya plans on shedding compliance features of the deal if and when the standards are officially dead.
Last week, Neuberger Berman Investment Advisors was among the first managers to refinance or issue a new CLO without bringing it into compliance. However, Neuberger Berman has a backup plan; deal documents allow it to issue risk retention notes, if necessary, in the event of an appeal to the full D.C. Circuit appeals court or to the U.S. Supreme Court.
The Voya CLO 2013-2 portfolio will be only the fourth Voya-managed deal issued before mid-2016 to adapt to the standards through a refinancing.
Voya has issued eight CLOs since 2016 that comply with skin in the game rules; the most recent being the $661.2 million Voya CLO 2018-1, which priced in February. Voya has $10.6 billion of outstanding CLO assets under management, according to Fitch Ratings.
S&P’s report did not detail the risk-retention structure Voya will adopt, but previous retention-compliant refinancings each applied an eligible vertical interest to the portfolio, including a January reset of the $421.6 million Voya CLO 2016-1 portfolio.