The Securities and Exchange Commission (SEC) may allow collateralized loan obligation funds (CLOs) to refinance without managers having to meet the five percent skin in the game requirement, a market source said.
The SEC has been in talks with the Loan Syndication and Trading Association (LSTA) since the rules – aimed at creating greater alignment of interest between managers and investors – were published in December 2014. The rules take effect in December 2016.
The SEC did not respond to a request for comment. The LSTA declined to comment.
Many CLO managers, anticipating the rules before December 2014, had shortened their non-call periods, typically two years long in duration, thus enabling them to reprice and refinance the CLO tranches in the three month period leading up to December 2016.
As a result, a lot of deals are expected to refinance during this timeframe. In an effort to relieve the capital pressure placed on managers by the five percent retention rule, it is anticipated the SEC could publish no-action documentation, meaning that they would take no action against managers who reprice tranches without holding five percent of the risk ahead of the deadline for the new rules.
Secondly, if a deal is repriced after the effective rule dates, managers of refinancing vehicles would have to hold the capital in proportion to the piece that is refinanced rather than the whole CLO, reducing the capital to be retained.
Any deals issued after rules were published in December 2014 are not expected to come under the same no-action guidelines.