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Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting. 
Continue Reading Beany & CECL

A new OnPoint from Dechert’s Employee Benefits and Executive Compensation team discusses a recent ruling from a federal court in the Southern District of New York. There, a pension plan that had acquired notes issued by a vehicle invested in a pool of sub-prime residential mortgage-backed securities is arguing that the vehicle’s assets are “plan…

On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 
Continue Reading Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

As we return to our desks after last week’s whirlwind in Las Vegas for the Structured Finance Industry Group (SFIG) Conference, we find ourselves reflecting on how this conference was at once business as usual while also showing evidence of an evolving industry looking to the future. Approximately 8,050 attendees, including a sizable Dechert team, gathered last week at the Aria to discuss past, present and future and to put our heads together to ask “where do we go from here?”
Continue Reading SFIG Vegas 2019

With full and complete credit to the Bard (Macbeth), and to Mr. Ray Bradbury who repurposed this line as the title for his 1962 dark fantasy (of which I was and still am a huge fan), there is just not a better title for this note. Trust me. A few weeks ago, I inked a note about whether the current expansion was soon coming to an end and whether it made sense to begin to “get the distressed debt band back together again.” Tongue slightly in cheek then because things seemed awfully good, I made the argument that we are not really all that far away from an abrupt right turn off the highway of good times onto the dirt road of distress. It apparently resonated (or at least there’s lots of people who think like me). Dechert is hosting a distressed debt conference on October 18, 2018 in New York which will touch on a wider range of issues but will include a distressed debt panel and we now have almost 400 RSVPs. We’ll report on that next week. That’s either 400 people with nothing better to do, or 400 folks who think it might just as well be time to start thinking about the end of days.
Continue Reading The Next Recession: Something…Perhaps Not Really Wicked… But Certainly Annoying…This Way Comes

In February, the D.C. Court of Appeals ruled in The Loan Syndications and Trading Association v. Securities and Exchange Commission and Board of Governors of the Federal Reserve System, No. 17-5004 (D.C. Cir. Feb. 9, 2018) (the “LSTA decision”) that a manager of an open market CLO is not required to retain risk under the Dodd-Frank Act and Regulation RR, because only a securitizer which transfers financial assets into a securitization vehicle must retain risk.  No transfer, no risk retention.

In its decision (joined by Judge Brett Kavanaugh), the Court was very clear in its analysis.  Essentially, the decision said “thank you very much, we can read simple English sentences, and the law is crystal clear on this point (if not on much else).”  The regulators may not elide the transfer requirement of the Dodd-Frank Act by calling managers of open market CLOs securitization sponsors, when they don’t transfer assets to a securitization vehicle.  The Court went on to point out that if this was a loophole, it needed to be fixed by Congress, not the regulators.  Blessedly, a satisfying, albeit rare, victory for a plain reading of our mother tongue.  The regulations actually mean what they say!

The broadly syndicated CLO business has taken this ruling to heart and has been beavering away on transaction structures that no longer provide for the retention of credit risk. One big issue in that space now is whether you can square the circle about avoiding risk retention in the US, while somehow meeting the EU risk retention criteria.  But that’s a bit of legerdemain for discussion another day.  What I want to talk about is the utility of the LSTA decision in spaces other than the broadly syndicated CLO space—particularly for commercial real estate single-asset, single-borrower (SASB) securitizations, a product representing almost half of all CRE securitization offerings this year.
Continue Reading The Boundaries of Risk Retention Now That the D.C. Circuit Has Spoken

Around this time of year, we slip on the prognostication goggles and take a look forward into the next year.  While there is ample evidence that prognostication is a dodgy exercise, I always tell my folks that the fact that it’s hard to do and extraordinarily unreliable is not an excuse not to have a view.  To not have a view is actually to have one and just not acknowledge that you do.  It doesn’t matter how unlikely we are to get it right: planning beats clinging to guns, God and Brownian motion as a model for the well-lived life.
Continue Reading In 2018 We Are: (a) Doomed, or (b) in the Warm Embrace of Goldilocks

Last week, an article written by Mr. Frank Partnoy, professor of law at the University of San Diego,  appeared in the Financial Times and was subsequently picked up by The Wall Street Journal.  Mr. Partnoy argues that the next global financial crisis will be found inside the CLO industry and that past is prologue.

I think he is looking under the wrong rock for the next global financial crisis and this note should serve as a letter to the editor in rebuttal, as it were.  (Perhaps I’ll send Professor Partnoy his own personalized copy.)

Here’s the news flash:  There will be another global financial crisis.  Death, taxes, the cycle and Page Six misbehavior will never go away.  However, history suggests that the next one will be less severe than the 2007-2009 meltdown which, one can hope will continue to be entitled to the honorific “The Great Recession” for many decades to come. 
Continue Reading The Sequel to the Global Financial Crisis Is Not the CLO! (Ok, Not Yet)

The Auditing Standards Board (the “ASB”) of the American Institute of Certified Public Accountants recently released new standards as part of the “Attestation Clarity Project” with the goal of redrafting all its standards “in clarity format” (what format were they in before?  And, while we’re at it, can we try to use English here?  Clarity format?).  This Project will require compliance by bankers and issuers with very specific disclosure obligations (reps?) before the auditors will issue an Agreed Upon Procedures Letter (AUPs) for securitizations.  Some of this formalized existing practice, but the changes go further and are far more prescriptive.  A “new letter of representation” from the party who hires the auditors (the “Engaging Party”) is required as well as similar letters from the parties providing the data that the auditors are reviewing (each, a “Responsible Party”).  These new rules will become effective on May 1, 2017.  Any AUP that is issued after May 1 will be subject to the new rules.
Continue Reading New Accounting Rules Regarding AUPs Taking Effect May 1, 2017:  More Fun for a Battered Industry