| NEW YORK, March 28
NEW YORK, March 28 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
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
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
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)