Trepp LLC

02/09/2018 | News release | Distributed by Public on 02/09/2018 15:50

US Court Rules That CLO Managers Are Exempt from Risk Retention Requirements

According to Bloomberg, a US appeals court ruled today that CLO managers are exempt from risk retention requirements. The court ruled that the requirements do not apply to CLO managers 'because they don't make loans or hold them as assets.' This ruling has a significant impact on a number of players in the CLO market, as well as the securitized space as a whole.

For starters, the exemption should spur new CLO deal activity. Those who were kept out of the market due to risk retention and capital requirements, such as smaller CLO managers, will be encouraged to rejoin the market. US CLO issuance climbed nearly 43% from $76.3 billion in 2016to $110 billion in 2017. Nearly $10 billion in US CLOs have been issued thus far in 2018, and it's certainly possible that the pace will accelerate in light of managers no longer being subject to risk retention rules.

Created as a part of Dodd-Frank, risk retention was enacted to ensure that issuers of a securitized transaction were 'keeping skin in the game.' The rules require that issuers retain a piece equal to 5% of risk from every transaction they issue. For CLOs, that 5% stake is typically much larger than an equity tranche which usually amounts to less than 10% of the notional value.

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The information provided is based on information generally available to the public from sources believed to be reliable.