93850823-1In anticipation of the effective date of the Final Rule on December 24, 2016 (early Christmas gift?), CLO market participants have been constructing solutions that allow collateral managers to raise the capital necessary to support investments required by the Final Rule.

We have seen an increased use of a hybrid structure that has been referred

93850823-1More than 100 senior executives participated in Dechert’s Risk and Rewards of CRE-CLO and CLO Securitizations: Navigating the Capital Markets seminar.  The half day event, supported by  CRE Finance Council (CREFC) and the Loan Syndications and Trading Association (LSTA), focused on themes important to the CLO market and the CRE securitization market.  Panelists addressed

A securitization community coming off of record issuances in 2014 has entered the new year with a mixture of nerves and optimism.  An estimated 6,500 finance professionals and attorneys converged for the 2015 ABS Las Vegas conference.  The new risk retention rules, and their impact on CLOs in particular, were on everyone’s lips – to the point that one panel moderator opened his remarks by saying that he was narrowing the stated discussion topic to focus exclusively on CLO risk retention, at the urging of the panelists and audience.
Continue Reading ABS Las Vegas 2015

By: Daniel Wohlberg and Sean Solis

On Sunday, September 21st through Tuesday, September 23rd, almost 3,500 industry insiders descended upon Miami Beach for the 20th annual ABS East Conference at the acclaimed Fontainebleau Hotel. The enthusiasm and excitement was palpable considering the record setting year the market had so far, especially in the CLO space.  The general tenor was cautious optimism as many believe the roaring market would continue for the next few years, but saving a bit of hesitation for some of the regulatory pitfalls up ahead.  Most were comfortable, however, considering the market’s resilience in dealing with the recent implementation of the Volcker Rule.

Continue Reading Securitization in the Sand – ABS East Turns Twenty

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

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

On April 7th the Federal Reserve Board (the “Fed”) announced that it would provide banking entities with two additional one-year extensions to conform their ownership of CLOs covered by the Volcker Rule.  The Fed stated that it would act on these extensions in August of 2014 and 2015.  The Fed’s action would extend the conformity period from the current deadline of July 2015 to July 2017.  The Fed’s approach to remediating the unintended consequences created by the Volcker Rule brings to mind a famous quote by famed publisher Malcolm S. Forbes, that “[i]t’s so much easier to suggest solutions when you don’t know too much about the problem.”  While the extension offers some relief for CLO 1.0 (i.e. pre-2008) deals, it fails to alleviate the effects of the Volcker Rule on the CLO market.  Considering the overwhelming testimony regarding the potential impacts of the Volcker Rule, one must wonder if the regulators appreciate the Volcker Rule’s material impact on the CLO market.
Continue Reading Federal Reserve Extends Volcker CLO Compliance Period

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

Befitting the holiday season the regulators recently decided to bestow upon us all the much anticipated (dreaded?) Volcker Rule. At 1100 pages of truly riveting reading material, Volcker has certainly given all of us plenty to wade through during these recent cold winter weeks and much to the surprise of the structured credit industry there were material provisions sprinkled throughout the 1100 pages that significantly affected the collateralized loan obligation market.
Continue Reading CLOs under the Volcker Rule: New Exemptions, New Issues, New Obligations – Part I

Section 926(1) of the Dodd-Frank Act required the Securities and Exchange Commission (“SEC”) to adopt rules that disqualify securities offerings involving certain felons and other “bad actors” from reliance on Rule 506 under Regulation D of the Securities Act of 1933 (“Securities Act”). New paragraph (d) of Rule 506 was adopted pursuant to the mandate of Section 926(1) and became effective on September 24, 2013. Under such new paragraph (d) (“Bad Actor Provisions”) the involvement of bad actors in a private offering could have the effect of disqualifying the offering from the safe harbor exemption from registration provided under Rule 506. As such the Bad Actor Provisions require issuers that intend to rely on the Rule 506 exemption to undertake additional diligence.

A CLO’s capital stack often includes a portion of subordinated notes that are offered for purchase to institutional accredited investors (“IAI”) and/or accredited investors (“AI”). These IAI and AI purchasers typically meet the requirements to be considered covered purchasers under Rule 506. Due to the fact that IAI and AI purchasers meet the scriptures of Rule 506, CLO market participants have raised questions as to whether the Bad Actor Provisions will require participants in a CLO transaction to undertake additional diligence and whether such additional diligence could negatively impact the market for CLO subordinated notes.Continue Reading The recently finalized “Bad Actor” rules and their applicability to CLO transactions