Partners Group Adjusts Approach to Risk Retention in First New Euro CLO Following ESA Rules Surprise

Partners Group has adjusted its approach to risk retention in a European CLO that priced today in order to comply with a new interpretation of securitization rules, according to market sources.

The €409 million deal, which is named Penta 19 and was arranged by Bank of America, is the first to be issued after the European Supervisory Authorities surprised the market with a report citing concerns that third-party equity vehicles “may not meet the objective of ensuring economic alignment between the sell-side and buy-side of a securitisation transaction.”

In Wednesday’s deal, Partners Group opted for vertical risk retention via a capitalized manager vehicle. The manager’s previous deals were issued with horizontal risk retention through a third-party equity origination vehicle.

The solution found for Penta 19 was a rapid response to a change in circumstances for a deal close to pricing. Partners Group plans to review its approach once a clearer picture of the new situation emerges, Octus understands.

European CLO managers are scrambling to adjust to the stricter reading of the “sole purpose” test for risk retention vehicles outlined in EU regulation, according to market sources.

The ESAs’ interpretation of the rule includes that the vehicles must generate less than 50% of their revenue from the securitized assets.

According to the report, “going forward, any new issuance should apply this interpretation.” Market participants said this is understood to include resets and refinancings of existing CLOs.

Several bankers told Octus that they are not aware of live deals being canceled over the changes, but uncertainty around how to comply with the rules could cause delays in issuance from warehouses.

Managers highlighted that it is unclear whether the new interpretation applies to about 30 CLOs that have priced but not closed yet. It takes about six to eight weeks to close a new-issue CLO after pricing, and about two for a reset.

Bank of America priced the triple-A tranche of Penta 19 at Euribor+125 bps, in line with where market participants predicted spreads to land after the volatility of recent weeks. Senior tranches of other deals in the pipeline for the coming week are expected to be priced within a range of 125 to 127 bps.

Penta 19 has a noncall period of 1.5 years and a reinvestment period of 4.5 years.