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SEC Grants No-action Relief from Risk Retention for Legacy CLO Refinancing
Practical Law Legal Update 1-617-5842 (Approx. 4 pages)
SEC Grants No-action Relief from Risk Retention for Legacy CLO Refinancing
by Practical Law Finance
| Published on 21 Jul 2015 • USA (National/Federal) |
The SEC granted conditional no-action relief from final Dodd-Frank credit risk retention rules to CLO manager Crescent Financial Group for a refinancing of a legacy CLO it manages, subject to certain specified conditions. The letter and the accompanying no-action request may serve as a template for future legacy CLO refi exemptions from the retention rules.
On July 17, 2015, the SEC granted conditional no-action relief from final Dodd-Frank credit risk retention rules to manager Crescent Financial Group for a refinancing of a legacy collateralized loan obligation (CLO) it manages, after the rules take effect, subject to certain specified conditions. The rules require that securitizers, including CLO managers, retain 5% of the credit risk of securitized asset pools backing non-exempt asset-backed securities (ABS). The letter and the accompanying no-action request may serve as a template for future legacy CLO refinancing exemptions from the retention rules.
The risk retention rules, issued under Section 941 of the Dodd-Frank Act, are scheduled to take effect for CLOs issued after December 24, 2016 (see Legal Update, Compliance Dates Set for ABS Risk Retention Rules). CLOs issued prior to that date are legacy CLOs grandfathered from the retention requirements. CLO refinancings undertaken after that date, however, may be subject to the retention rules.
Crescent's request for no-action relief relates specifically to a CLO that was issued before December 24, 2014, the date of issuance of the final risk retention rules. According to Crescent, the CLO's refinancing feature was therefore not structured to accommodate risk retention, and neither the collateral manager nor the investors in the CLO notes expected that the risk retention obligation would apply with respect to a refinancing.
The SEC's no-action relief to Crescent is subject to the following conditions:
- Any refinancing will be completed (by the issuance of the relevant refinanced notes) within four years after the original closing date of the CLO transaction.
- The interest rate applicable to the refinanced notes will be lower than the interest rate on the original notes.
- Other than the reduction of the interest rate of the original notes, after giving effect to a refinancing:
- the CLO entity's capital structure will be unchanged;
- the principal amount of the refinanced notes after a refinancing and the original notes after a refinancing will be the same;
- the priority of right of payment of the refinanced notes and the original notes will be the same;
- the voting and other consent rights of the refinanced notes and the original notes will be the same; and
- the stated maturity of the refinanced notes and the original notes will be the same.
- The CLO entity's investment criteria will not change as a result of the refinancing.
- No securitization of additional assets will be effected by a refinancing (in other words, proceeds from the issuance of the refinanced notes will be used only for the redemption of the original notes), it being understood that the collateral manager will continue to actively manage the collateral obligations on the CLO entity's behalf.
- No additional subordinated interests will be issued in connection with a refinancing.
- A refinancing will not cause the identity of the holders of subordinated interests to change.
- A refinancing of different classes of secured notes may occur on different dates; however, each class of secured notes will be subject to only one refinancing and the supplemental indenture executed in connection with refinancing each class will prohibit any further refinancing of the refinanced notes.
- The offering document for the replacement notes issued in the refinancing will, among other things:
- include a prominent statement on the cover of the offering document that the sponsor is not retaining a risk retention interest as contemplated under the final Dodd-Frank risk retention rules in connection with a refinancing or the refinanced notes;
- describe the interest rates of the refinanced notes and confirm that all other legal and economic terms of the refinanced notes will be the same as the original notes; and
- include a statement in a section entitled "Credit Risk Retention" to the effect that reliance on the no-action letter does not preclude the availability of any applicable private rights of action for any violation of the federal securities laws.
Market participants can now have confidence that CLO refinancings that adhere to the same parameters as those described in the Crescent no-action request will be similarly exempt from the retention requirement. Note that it is unclear whether a refinancing of a CLO issued after December 24, 2014 but before the effective date of the rules, December 24, 2016, would be subject to retention or eligible for similar relief.
The SEC's no-action relief comes as the agency considers a compromise that would allow legacy CLOs issued before December 24, 2014 to refinance after risk retention rules take effect in December 2016 without having to hold 5% of the transaction's overall credit risk (see Legal Update, SEC Considers Allowing Certain CLOs to Refinance Without Risk Retention Penalty).
For further details on the final Dodd-Frank ABS credit risk retention rules, see Practice Note, US Risk Retention Requirements for Asset-Backed Securities (ABS).