European regulators to reassess CLO rules

 Market participants are urging European regulators to reassess CLO rules, which they believe have barred new CLOs being raised since the credit crisis.   

 The number of CLO managers has almost halved – with most of the old CLOs launched prior to regulatory backlash reaching the end of their maturities. Market participants are lobbying regulators for a removal of stringent risk retention rules.  

 Nicholas Voisey, director at the Loan Market Association (LMA) said: “There are two main reasons why there has been virtually no issuance of CLOs in Europe. Firstly, market conditions have been unfavourable and secondly, regulatory risk retention requirements arising from the European Capital Requirements Directive 2 are largely prohibitive.”  

These require either an originator, sponsor or original lender to hold an economic interest of at least five percent in the securitisation, he explained.   

“Most CLO managers do not have the capacity to hold the retention required. The LMA has been in talks with regulators, seeking ways to solve the regulatory requirement so that this important source of funds, particularly to the sub-investment part of the market, can function effectively”, he said. 

A spokesman for the EBA told Private Debt Investor:  “The CRDIV/CRR proposal currently discussed at EU level includes a mandate for the EBA to draft regulatory technical standards (RTS) on securitisation retention rules. The discussions are still ongoing and a public consultation on the RTS will be organised later this year. In this respect, it is too early to draw conclusions on what the final text will look like.” 

Some, like S&P Capital IQ director Sucheet Gupte, feel that regulation isn’t to blame however. “Regulation is a hurdle that most people get around. I don’t see it as a hindrance for the market. Most of the large CLOs would have no problems with the risk retention rate. There just aren’t enough deals to get the CLO market moving,” he said.  

In order for investors to make any substantial returns from CLOs, managers are typically required to buy at least 100 loans, and subsequently package them into one pool. Institutional investors buy portions of this pool, offering different payouts depending on the level of risk the investor takes.  

If the underlying loans struggle, the fund keeps payouts from investors who hold the riskiest part of the CLO. The CLO manager may then use that cash to buy out new loans, preventing the liquidation of the fund.