News: CVC LPC: CLO market keeps refinancing options open

Collateralized Loan Obligation funds (CLOs) are adding provisions to refinancing deals that will allow them to cut interest payments for a second time and boost payments to equity holders if President Donald Trump goes ahead with plans to dismantle the Dodd-Frank Act.

CVC Credit Partners and Seix Investment Advisors have refinanced CLOs recently and added language that will allow them to refinance again if key Dodd Frank risk-retention rules are changed or removed, sources said.

The risk-retention rules, which require managers to hold 5% of their funds as of last year, are partly responsible for an anticipated 30% drop in CLO volume this year. Eliminating the rules could boost CLO volume and provide more capital to invest in US leveraged loans.

Cutting spreads again in a second refinancing will reduce payments to senior debt holders and boost payments to CLO equity holders, which could attract investors and make it easier to sell new funds.

"If a manager and equity can take that second refinancing, it definitely adds optionality, reduces the upfront costs of doing a new deal and the manager starts with a fully ramped portfolio," said Dave Stehnacs, a portfolio manager at ZAIS Group.

NO-ACTION LETTER The Securities and Exchange Commission (SEC) released a no-action letter in July 2015 in response to a request from investment firm Crescent Capital Group, which said that CLOs issued before the risk-retention rule was established on December 24 2014, can refinance without buying a retention slice.

No-action letters can be issued by regulators in response to a question about whether an activity may violate the existing rule.

To qualify under the 'Crescent Letter,' a CLO refinancing must be completed within four years of closing, the interest rate must be lower than the original spread, the maturity cannot change, and, crucially, a manager can only refinance a tranche once.

This refinancing provision can be used if the rule no longer applies to CLOs either because of a change in interpretation, a court case, or a Congressional or regulatory change, according to Paul St. Lawrence, a partner at law firm Cleary Gottlieb Steen & Hamilton.

"Once the legal regime changes, then the whole rationale for why the no-action letter was prohibiting an additional refinancing goes away," he said.

Spokespeople for the SEC, Seix and CVC all declined to comment.

RESET OPTION Some firms are also considering adding language that allows the same tranche of debt to be refinanced a second time if CLO managers agree to make deals risk-retention compliant, sources said.

Managers will be able to keep their assets and save money if firms use second refinancings as resets to extend maturities and keep CLOs in place longer, but it is unclear how the SEC will view the provisions.

It is cheaper to refinance a CLO than raise a new deal, according to Bjarni Torfason, a CLO analyst at Deutsche Bank.

Some senior investors are pushing back against these provisions and are agreeing to join new tranches only if an additional refinancing is prohibited, according to Steven Kolyer, a partner at law firm Clifford Chance.

CLO refinancing has been active recently as the funds have to be refinanced within four years to qualify under the 'Crescent Letter,' which means that the window to rework 2013 and 2014 funds is closing.

About 100 US CLOs have been refinanced this year and spreads on the most senior tranches have been cut to as little as 101bp, according to Thomson Reuters LPC Collateral.

Deutsche Bank estimates that almost 160 CLOs that were issued before December 24, 2014, with a reinvestment period ending in 2017 or later have not been refinanced or reset yet and are prime refinancing candidates with Triple A coupons of 130bp or higher.