(a) Definitions. For purposes of this section, the following definitions
shall apply:
CLO means a special
purpose entity that:
(i) Issues debt and equity interests,
and
(ii) Whose assets
consist primarily of loans that are securitized assets and servicing
assets.
CLO-eligible loan tranche means a term loan of a syndicated
facility that meets the criteria set forth in paragraph (c) of this
section.
CLO manager means an entity that manages a CLO, which entity is registered as
an investment adviser under the Investment Advisers Act of 1940, as
amended (15 U.S.C. 80b-1 et seq.), or is an affiliate of such
a registered investment adviser and itself is managed by such registered
investment adviser.
Commercial borrower means an obligor under a corporate credit
obligation (including a loan).
Initial loan syndication transaction means a transaction in which a loan is syndicated to a group of
lenders.
Lead arranger means, with respect to a CLO-eligible loan tranche, an institution
that:
(i) Is active in the origination, structuring
and syndication of commercial loan transactions (as defined in section 244.14) and
has played a primary role in the structuring, underwriting and distribution
on the primary market of the CLO-eligible loan tranche.
(ii) Has taken an allocation
of the funded portion of the syndicated credit facility under the
terms of the transaction that includes the CLO-eligible loan tranche
of at least 20 percent of the aggregate principal balance at origination,
and no other member (or members affiliated with each other) of the
syndication group that funded at origination has taken a greater allocation;
and
(iii) Is identified
in the applicable agreement governing the CLO-eligible loan tranche;
represents therein to the holders of the CLO-eligible loan tranche
and to any holders of participation interests in such CLO-eligible
loan tranche that such lead arranger satisfies the requirements of
paragraph (i) of this definition and, at the time of initial funding
of the CLO-eligible tranche, will satisfy the requirements of paragraph
(ii) of this definition; further represents therein (solely for the
purpose of assisting such holders to determine the eligibility of
such CLO-eligible loan tranche to be held by an open market CLO) that
in the reasonable judgment of such lead arranger, the terms of such
CLO-eligible loan tranche are consistent with the requirements of
paragraphs (c)(2) and (3) of this section; and covenants therein to
such holders that such lead arranger will fulfill the requirements
of paragraph (c)(1) of this section.
Open market CLO means a CLO:
(i) Whose assets consist of senior, secured syndicated loans acquired
by such CLO directly from the sellers thereof in open market transactions
and of servicing assets,
(ii) That is managed by a CLO manager,
and
(iii) That holds
less than 50 percent of its assets, by aggregate outstanding principal
amount, in loans syndicated by lead arrangers that are affiliates
of the CLO or the CLO manager or originated by originators that are
affiliates of the CLO or the CLO manager.
Open market transaction means:
(i) Either an initial loan syndication
transaction or a secondary market transaction in which a seller offers
senior, secured syndicated loans to prospective purchasers in the
loan market on market terms on an arm’s length basis, which prospective
purchasers include, but are not limited to, entities that are not
affiliated with the seller, or
(ii) A reverse inquiry from a prospective
purchaser of a senior, secured syndicated loan through a dealer in
the loan market to purchase a senior, secured syndicated loan to be
sourced by the dealer in the loan market.
Secondary market transaction means a purchase of a senior, secured syndicated loan not in connection
with an initial loan syndication transaction but in the secondary
market.
Senior,
secured syndicated loan means a loan made to a commercial borrower
that:
(i) Is not subordinate in right of payment
to any other obligation for borrowed money of the commercial borrower,
(ii) Is secured by
a valid first priority security interest or lien in or on specified
collateral securing the commercial borrower’s obligations under the
loan, and
(iii)
The value of the collateral subject to such first priority security
interest or lien, together with other attributes of the obligor (including,
without limitation, its general financial condition, ability to generate
cash flow available for debt service and other demands for that cash
flow), is adequate (in the commercially reasonable judgment of the
CLO manager exercised at the time of investment) to repay the loan
and to repay all other indebtedness of equal seniority secured by
such first priority security interest or lien in or on the same collateral,
and the CLO manager certifies, on or prior to each date that it acquires
a loan constituting part of a new CLO-eligible tranche, that it has policies
and procedures to evaluate the likelihood of repayment of loans acquired
by the CLO and it has followed such policies and procedures in evaluating
each CLO-eligible loan tranche.
(b) In general. A sponsor
satisfies the risk retention requirements of section 244.3 with respect
to an open market CLO transaction if:
(1) The open market CLO does not acquire
or hold any assets other than CLO-eligible loan tranches that meet
the requirements of paragraph (c) of this section and servicing assets;
(2) The governing documents
of such open market CLO require that, at all times, the assets of
the open market CLO consist of senior, secured syndicated loans that
are CLO-eligible loan tranches and servicing assets;
(3) The open market CLO does not invest
in ABS interests or in credit derivatives other than hedging transactions
that are servicing assets to hedge risks of the open market CLO;
(4) All purchases of CLO-eligible
loan tranches and other assets by the open market CLO issuing entity
or through a warehouse facility used to accumulate the loans prior
to the issuance of the CLO’s ABS interests are made in open market
transactions on an arms-length basis;
(5) The CLO manager of the open market
CLO is not entitled to receive any management fee or gain on sale
at the time the open market CLO issues its ABS interests.
(c) CLO-eligible loan tranche. To qualify as a CLO-eligible loan tranche, a term loan of a syndicated
credit facility to a commercial borrower must have the following features:
(1) A minimum of 5 percent
of the face amount of the CLO-eligible loan tranche is retained by
the lead arranger thereof until the earliest of the repayment, maturity,
involuntary and unscheduled acceleration, payment default, or bankruptcy
default of such CLO-eligible loan tranche, provided that such lead
arranger complies with limitations on hedging, transferring and pledging
in section 244.12 with respect to the interest retained by the lead
arranger.
(2) Lender
voting rights within the credit agreement and any intercreditor or
other applicable agreements governing such CLO-eligible loan tranche
are defined so as to give holders of the CLO-eligible loan tranche
consent rights with respect to, at minimum, any material waivers and
amendments of such applicable documents, including but not limited
to, adverse changes to the calculation or payments of amounts due
to the holders of the CLO-eligible tranche, alterations to pro
rata provisions, changes to voting provisions, and waivers of
conditions precedent; and
(3) The pro rata provisions, voting provisions, and similar
provisions applicable to the security associated with such CLO-eligible
loan tranches under the CLO credit agreement and any intercreditor
or other applicable agreements governing such CLO-eligible loan tranches
are not materially less advantageous to the holder(s) of such CLO-eligible
tranche than the terms of other tranches of comparable seniority in
the broader syndicated credit facility.
(d) Disclosures. A sponsor relying
on this section shall provide, or cause to be provided, to potential
investors a reasonable period of time prior to the sale of the asset-backed
securities in the securitization transaction and at least annually
with respect to the information required by paragraph (d)(1) of this
section and, upon request, to the Commission and its appropriate Federal
banking agency, if any, the following disclosure in written form under
the caption “Credit Risk Retention”:
(1) Open market
CLOs. A complete list of every asset held by an open market CLO
(or before the CLO’s closing, in a warehouse facility in anticipation
of transfer into the CLO at closing), including the following information:
(i) The full legal name, Standard Industrial Classification (SIC)
category code, and legal entity identifier (LEI) issued by a utility
endorsed or otherwise governed by the Global LEI Regulatory Oversight
Committee or the Global LEI Foundation (if an LEI has been obtained
by the obligor) of the obligor of the loan or asset;
(ii) The full name of the
specific loan tranche held by the CLO;
(iii) The face amount of the entire
loan tranche held by the CLO, and the face amount of the portion thereof
held by the CLO;
(iv) The price at which the loan tranche was acquired by the CLO;
and
(v) For each
loan tranche, the full legal name of the lead arranger subject to
the sales and hedging restrictions of section 244.12; and
(2) CLO manager. The full legal name and form of organization of
the CLO manager.
