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NEW YORK, March 28 (Reuters) - In a letter submitted Thursday to six federal regulatory agencies, the U.S. Chamber of Commerce argued that proposed risk retention rules could hamper the future formation of collateral loan obligations (CLO) and consequently raise financing costs for businesses.
The proposed risk retention rules, which are part of broader Dodd-Frank banking legislation, would require CLO managers to hold capital equal to 5 percent of each CLO issued. Due to the potentially large capital requirements needed, this could squeeze out many but the largest managers from the market.
"The Chamber of Commerce has recognized the importance of this issue and asked its members to weigh in," said Elliot Ganz, general counsel and executive vice president at the LSTA.
The U.S. Chamber of Commerce contends that CLOs are not "originate to distribute" securitizations. Such securitizations are commonly associated with certain types of mortgage-backed securities in which banks originate mortgages and then sell them for a fee to broker dealers to repackage into securities for resale.
The leveraged loan and CLO market instead involves a number of third party CLO investment mangers analyzing and ultimately making investment decisions on loans available in the open market.
Citing a survey from the Loan Syndications and Trading Association (LSTA), the U.S. Chamber of Commerce contends that the proposed risk retention rules could shrink the market for future CLOs by over 70 percent.
According to an LSTA-commissioned market study conducted by Oliver Wyman, CLO market contraction could raise financing margins by more than one-third, thereby increasing annual interest costs by approximately $3.2 billion.
"The risk retention rules had been put on the backburner in light of the December release of the Volcker Rule," said Ken Kroszner, CLO strategist at RBS. "But as written, risk retention will very likely have a larger impact on new CLO issuance than Volcker."
In the letter, the U.S. Chamber of Commerce is inviting regulators, including the Federal Deposit Insurance Corporation and Federal Reserve, "to reconsider the proposed rule and work with the industry to develop a form of risk retention that would work for CLOs."
A group of 31 companies and organizations, including several leveraged loan issuers such as Community Health, HCA, and West Corporation, signed the letter. (Editing By Jon Methven)