Securitization

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While leveraged loan ETF and money market funds face an unsteady near-term future amidst ongoing retail investor outflow, the CLO market is rolling towards its busiest year ever.  With year-to-date global issuance at approximately $98 billion (with $89 billion or so in the U.S. alone) as of mid-September, many market commentators see $125 billion in total U.S. CLO issuance by year-end as a real possibility.  Recent reports calculate that CLOs accounted for nearly 60% of new issue institutional leveraged loan demand in the first half of 2014.  As new collateral managers continue to enter the market and the industry has recovered from the Volcker Rule chill of mid-winter, market actors are now preparing to deal with the challenges that the forthcoming U.S. risk retention rules will inevitably present.

With all of the above news dominating the CLO headlines, some market observers may have missed a less heralded development in the CLO market, which is very likely to have an impact on both the CLO market and the leveraged loan market.  On August 1, 2014, S&P released an updated CLO rating methodology that provides for a more nuanced classification of recovery assumptions related to the assets acquired by CLOs.  The challenges and opportunities presented by the updated S&P methodology are worthy of attention.
Continue Reading CLO Market Update: S&P Recovery Ratings, More’s the Merrier

With apologies to Jerome Kern and Oscar Hammerstein, and in the afterglow of a relatively amiable final AB Rule, we are reminded this week that our business remains hogtied to a regulatory establishment that can’t seem to stop regulating.  When a member of the regulatory apparatchiki hears someone observe, “Well, if I don’t get out of bed, I’ll never be in a car accident,” he or she starts thinking, well, maybe…a nice little rule could do wonders…!
Continue Reading Liquidity Coverage Ratio Rule: Birds Gotta Fly, Fish Gotta Swim…and Regulators Gotta Regulate

We at Crunched Credit have taken a bit of a pause of late.  It is, of course, the dog days of summer.  But it’s time to get back into the fray.  Let’s start by noting the doldrums seem to have taken a pass.  From where we sit, the markets seem to be in robust health.  As we look over this complex web of transactions, deal structures, innovations, capital flows, business plans, business goals, failures and successes that is our market, things look pretty damn good.
Continue Reading A Mid-Year Report Card on the Commercial Real Estate Capital Markets

A few steps forward and a giant leap back.  This familiar phrase might be the perfect summary of the CLO market’s Volcker Rule roller coaster since December 2013.  A few weeks ago we wrote about the Federal Reserve Board’s (the “Fed”) less than satisfying “fix” to address what the market has perceived as one of the Volcker Rule’s unintended consequences.  The Fed, in what had seemed to be an honest (although insufficient) attempt to prevent the need for banks to divest of holdings in CLO 1.0 transactions, agreed to provide two 1-year Volcker Rule conformance extension periods.  As extended, the conformance periods will expire in mid-2017.
Continue Reading Fed Issues Additional Guidance on Extended Conformance Period – Be Careful What You Ask For

During the past several years, CRE Securitizations were airbrushed off the financial products reviewing podium like a discredited Politburo member. Not here, never ever here; nope, never heard of it. This was a mistake rooted in populous politics and the conflation of the tools of finance with the tool users (okay, with some very unhelpful help from a few admittedly alarming design failures in the tool itself).

But now, eight years on, plenty of political and regulatory water has gone over the dam. As we said in a recent blog, it’s time for a reset and not just in the legal and regulatory arena, but in the market itself. Taking some liberties with recent news from Detroit, this nifty little coupe of a financial tool has had its successful recall, it’s new and improved, the engineering errors of the early models have been fixed and we’ve sorted out that neither the underaged nor the ethically challenged ought to be allowed to take this little guy out for a spin.
Continue Reading CRE Securitization: Rehabilitation Still In Progress

The Financial Times reported on April 2 that the Eurozone Banks continue to load up on sovereign debt; generally, the debt of their respective host countries.  A few days later, the Financial Times reported a bevy of talking heads crowing over the end of the EC financial crisis.  And then on April 16, the European Parliament voted to approve a slew of new laws for the EU banking marketplace, including a single resolution mechanism so comprised to be almost useless and a common rulebook for winding down the banks.  Does anyone here or there think any of this really matters?  First, it’s going to take years to generate the rules that this legislation birthed and even after the Euro apparatchiki spend years creating detailed rules, the dynamics of Brussels will ensure there will be so many loopholes it would make a block of Swiss cheese blush.  Moreover, does anyone actually think the various nation states will honor these rules if a champion bank is in trouble?  I, for one, do not. 
Continue Reading EU Banks –Dog Bites Man, Again

It’s still in the early days of 2014.  I think it’s finally stopped snowing in the East, the sun has come out and the stock market is continuing to outperform the woe purveyors.  Republicans and Democrats have gotten something done on the budget; lions have laid down with lambs; geopolitically, the world’s a mess but no one seems to care back home.  The financial crisis of 2007 and 2008 is beginning to fade into history.  Things are pretty good and likely to get better for quite some time.

Isn’t it, therefore, a great time to reset? To reset some of the regulatory and legislative excesses stitched together with little reflection during the crucible of the late, great credit crisis?  What appeared to make sense in the middle of that crisis simply doesn’t make a great deal of sense anymore and it’s time for a reset.   As John Maynard Keynes famously said, when the facts changed, he changed his mind.  Shouldn’t we?  It is the height of hubris and willful incuriousness to ignore four years of data and not recalibrate.

If we were to recalibrate, let’s think of some of the things we might rethink.Continue Reading Time for Regulatory Reset

In our previous post we discussed some of the structural challenges and opportunities facing CLO market participants since the Final Rule was released in December.  Today we tackle the age old question, “what is an ownership interest”.  The question is important because the tentacles of Volcker’s provisions prohibit banking entities from holding ownership interests in covered funds.  We will also briefly summarize a few other restrictions related to CLO transactions brought about by the Final Rule.
Continue Reading CLOs under the Volcker Rule: New Exemptions, New Issues, New Obligations – Part II