In a matter of days, CLO managers could be free from a requirement to keep skin in the game of their deals.
Some can't wait.
Neuberger Berman Investment Advisors is preparing to refinance a collateralized loan obligation originally issued in March 2016 that is currently grandfathered from risk-retention rules - without bringing the deal into compliance. Both Moody's Investors Service and S&P Global Ratings published presale reports on the $400.9 million transaction, Neuberger Berman CLO XXI, Wednesday.
So long as the rules remain "on the books," refinancing should trigger compliance. But on Feb. 9, the DC Circuit Court of Appeals held that risk-retention rules do not apply to managers of open market CLOs, overturning a decision by the DC District Court. The 45-day window for federal agencies to appeal the appeals court decision ends at midnight on Monday, March 26.
Assuming there is no appeal, the Circuit Court would mandate the District Court to vacate its last 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.
"If the agencies do not appeal by midnight Monday, the die will have been cast as far as the rule is concerned and it will be vacated within short order," said Elliot Ganz, executive vice president and general counsel of the Loan Syndications and Trading Association, the trade group that sued to have the rules invalidated.
Neuberger Berman CLO XXI's refinancing is not set to close until sometime next month. So the money manager - as well as Morgan Stanley, the deal's underwriter - appear to be confident that federal regulators will not appeal, and risk-retention rules will no longer apply to CLO managers at that point.
Neuberger Berman declined to comment.
There is a backup plan, however. Should the regulations still be in place when the deal closes, Neuberger Berman plans to sell additional notes that it will hold in order to comply, according to Moody’s.
“The arranger has advised us that, if the U.S. risk-retention rules will apply to the transaction on the refinancing closing date, the transaction will be upsized” to provide compliance through the manager’s vertical stake across the debt and equity tranches of the portfolio, the presale report states.
Neuberger Berman CLO XXI is potentially the first rated CLO to be noncompliant with risk retention since the fourth quarter of 2016, when managers rushed some $50 billion of deals to market in advance of the Dec. 24 effective date for the rules. No other CLO presale reports published this month have noted plans to issue notes out of compliance with the Dodd-Frank Act regulation.
However, at least one manager – GSO/Blackstone – has included contract provisions in a recent deal, the $1 billion Cook Park CLO, allowing it to modify the deal to avoid applying risk-retention rules to the portfolio without investor consent.
Other recent deals from managers including Apex Credit Partners, Hayfin Capital Management and Ares CLO Management, have been issued with the intent to comply with U.S. risk-retention standards. (Some deals, including MJX Venture Management’s Venture 31 CLO, were issued with dual compliance to both U.S. and European risk-retention standards.)
The Neuberg-Berman CLO XXI refinancing and extension will involve a tightening of the AAA tranche spread to 75 basis points over Libor, according to S&P Global Ratings. The manager is also extending the noncall period of the one year to April 2019, but maintaining the current reinvestment period expected to end in April 2020.