In recent months, CLO managers have utilized a variety of structural solutions to comply with U.S. and European Union (EU) risk retention requirements. Several such structures, including the capitalized manager vehicle (CMV) and the hybrid CMV, involve the formation of a new asset management entity to serve as CLO collateral manager on a going forward basis. Regardless of the chosen structure, great care must be taken to ensure that the underlying documentation does not unintentionally constrain a manager’s ability to obtain future third-party risk retention financing through “non-traditional loan facilities”.
Increasingly, the insurance companies and other financial institutions providing these nontraditional loan facilities are requiring that such facilities be assigned at least an investment grade rating, which can only be achieved if the facility “borrower” is established as a bankruptcy-remote entity. In contrast to the U.S. retention rules, where this is often accomplished by establishing a special purpose majority-owned affiliate (MOA) of the CLO manager, the EU risk retention regime bestows significant advantages—namely, shorter seasoning periods and a lower percentage of loans required to be purchased in the secondary market and transferred to the CLO issuer—upon structures in which the CLO manager itself (as opposed to an MOA or other entity) serves as the EU-mandated “originator.” Thus, any CLO manager desiring to both enhance future risk retention financing capabilities and streamline compliance with the EU retention requirements should strongly consider tailoring its manager-level organizational documents to be as consistent as possible with the rating agency bankruptcy-remote criteria.
Along similar lines, any CLO manager seeking to optimize its risk retention financing flexibility should take steps to ensure that each collateral management agreement, collateral administration agreement and other underlying document entered into by it, at every stage of its CLO platform, contains non-petition and limited recourse language in respect of such manager, even if nontraditional loan facilities aren’t presently contemplated as a future source of risk retention funding. Although amendments to underlying CLO documents are certainly possible, obtaining the requisite investor consent may prove to be a difficult and costly hurdle.
Please do not hesitate to contact Greg Cioffi (212-574-1439; cioffi@sewkis.com) with any questions.
