On July 17, 2015, the SEC published a no-action letter addressing the effect on the sponsor’s credit risk retention requirement of the refinancing of one or more tranches of existing CLO debt, an issue which has been of considerable interest to the CLO sector as it directly affects the utility of the refinancing option in transactions done before the adoption of the credit risk retention rules. In response to a request submitted by Crescent Capital Group LP, the SEC indicated that under the terms and conditions described in the request, such a refinancing of collateralized loan obligations priced prior to the December 24, 2014 publication of the final credit risk retention rules would not trigger the application of the credit risk retention requirement to the CLO. In order to be entitled to such treatment, among other things, (i) the refinancing must be completed within four years of the original closing date, (ii) the interest rate of the refinancing notes must be lower than the rate of the refinanced notes, (iii) other than the reduction in rates, the capital structure must remain unchanged and the principal amount, priority of payment, voting and consent rights and stated maturity of the refinancing notes must be the same as the refinanced notes, (iv) the investment criteria applicable to the CLO must remain unchanged, (v) the proceeds from the refinancing must be applied to repay the refinanced notes (and not applied as a means to acquire other assets), (vi) no additional subordinate interests may be issued in connection with the refinancing nor may the identities of the subordinated interest holders be changed as a result of the refinancing and (vii) while refinancing of different classes of notes may occur on different dates, each class may be refinanced only once. In addition, the offering document for the refinancing notes must prominently state, among other things, that the sponsor is not retaining a risk retention interest in connection with the refinancing. The no-action request and the SEC’s response are available through this link.
