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Although registration was up this year for IMN’s 22nd Annual ABS East conference held at the Fontainebleau Miami Beach earlier this month, attendance was lower than it’s been in previous years as many industry participants decided against attending due to concerns about the recent Zika outbreak in Miami. The CLO sector, however, continued to be well represented and the consensus of the conference attendees was that CLOs have a very positive future ahead.
Continue Reading Zika Keeps Investors Away From ABS East, But Not From CLOs

And now to return to our commentary a few weeks back about the stultifying impact of ill-thought through rules and regulations (at best) (Brexit has intervened).  This is our Regulatory State which broadly attempted to pick winners and losers and modify market behavior, to get an engineered outcome by using the blunderbuss of proscriptive rules and regulation.
Continue Reading A Trip Through the Labyrinth – The Regulatory Man in Full

We thought it would be useful to give a quick, interim update on the slow-motion train wreck that is our industry’s response to the upcoming effectiveness of the Risk Retention Rule.  For those of you who have been blessedly snoozing under a rock these past couple of years, the Risk Retention Rule becomes effective on Christmas Eve and applies to all transactions closed (priced?) after that date.  The Rule, to generalize a bit, requires the sponsor of a securitization to retain a 5% vertical or horizontal strip with the additional possibility of laying off some or all of that risk onto a qualified B piece buyer or a mortgage loan originator.  For more detail, please see our OnPoints, our risk retention briefing white papers and many, many back issues of this CrunchedCredit.

Here’s the headline in Muddville in May of 2017:

We As An Industry Are In Trouble. 

We as an industry don’t have a scalable solution to the problem.  We as an industry do not know what this will cost, who will pay for it, and to what extent this is an existential risk to CRE capital formation as it has been conducted for the past twenty-five years.Continue Reading Risk Retention: It’s the Fourth Quarter and the Home Team is Getting Glum

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

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

On August 28, 2013, six federal regulatory agencies (among them, the SEC, Federal Reserve, OCC and the FDIC (collectively, the “Agencies”)) released a 499 page second risk retention proposal (the “Second Proposal”). The Second Proposal covers risk retention for securitizers of all asset-backed securities, but also contains changes aimed directly at CLOs. For CLOs, the rules include both familiar provisions found in the first risk retention proposal (introduced in 2011) and new proposals, some of which are directed at alleviating the substantial burdens the Agencies themselves recognize the Second Proposal imposes on CLOs. Some of the proposals include new combinations of previously proposed forms of retention, new measurement metrics and holder eligibility criteria, hints at how grandfathering will be treated, a projected cash flow test for first-loss holders and an (likely ineffective) open market CLO option. The provisions outlined below do not reflect all changes found in the Second Proposal, but instead are meant to highlight some of the developments CLO participants may find important.Continue Reading Risk Retention Reproposal’s Impact on CLOs: Loan Arrangers Get Invited to the Party that No One Wants to Attend