LPC: CLO market cheers end of risk-retention rules

From Reuters - February 13, 2018

NEW YORK (Reuters) - Wall Street firms are cheering a court ruling that will exempt Collateralized Loan Obligation (CLO) funds from complying with Dodd-Frank Act rules that require investment managers to hold some of their deals risk.

The US Court of Appeals for the District of Columbia Circuit ruled last Friday that CLO funds, the largest buyer of leveraged loans, will no longer have to comply with skin in the game rules designed to align interests between managers and their investors.

The ruling was a win for the US$501bn asset class and is expected to benefit smaller managers most that struggled to find enough cash to buy the required retention in order to issue new deals or rework existing funds.

The overall takeaway by many market participants is that this is an important decision that will help grow the market, said Tom Majewski, founder of Eagle Point Credit Management, which invests in the equity and junior debt of CLOs.

CLO funds performed well during the financial crisis and saw the application of risk-retention rules as unfairly maligning the asset class by lumping them in with similar funds that were blamed for 2008s meltdown.

The Loan Syndications and Trading Association (LSTA) sued the Federal Reserve (Fed) and Securities and Exchange Commission (SEC) in 2014, arguing the risk-retention rules were arbitrary, capricious and an abuse of discretion.

The case bounced through the court system, with the Federal District Court for the District of Columbia ruling against the New York-based trade organization in 2016. The LSTA appealed and that decision was overturned by three Court of Appeals judges last week.

Regulators now have 45 days to seek an en banc review, a hearing in front of the active DC Circuit Appeals Court judges. The government also has a 90-day window to seek review from the Supreme Court, according to Richard Klingler, a partner at law firm Sidley Austin and the LSTAs counsel.

We are reviewing the courts decision, a Fed spokesperson said in an e-mailed statement. An SEC spokesperson declined to comment.


CLOs, which buy leveraged loans extended to companies including retailer Party City and health care facilities operator HCA, sell different tranches of varying risk of their fund to investors.


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