NEW YORK, Jan 15 (IFR) - The Loan Syndications and Trading Association (LSTA) urged US regulators on Wednesday to modify the Volcker Rule concerning collateralized loan obligations (CLOs) to prevent upheaval in the industry and potentially big losses for US banks.
Elliot Ganz, the LSTA’s executive vice president, told the House Financial Services Committee that the definition of “ownership interest” in the final Volcker Rule will have significant unintended consequences for the CLO market, including material losses for US banks and restrictions on the availability of credit for US businesses.
Five US bank regulatory agencies on Tuesday approved a tweak to the rule that would allow banks to keep interests in certain funds backed by trust-preferred securities, but they did not address CLOs.
“We are disappointed that the agencies have addressed the issue of CDOs of TruPs while not yet addressing the important concerns relating to CLO notes,” said Ganz.
“We are hopeful that the agencies will quickly take up our request that they confirm in guidance that the ability of holders of highly-rated AAA and AA rated debt securities to remove or replace a manager for cause does not constitute an ownership interest.”
Without that guidance, the CLO market could be disrupted because banks could be forced to divest these securities within the next 18 months, Ganz said.
According to the trade group, US banks hold approximately USD70bn of CLOs but would be forced to divest or restructure these notes over the next year and a half, possibly at a significant loss, without clarification on the first “indicia of ownership”.
“If the price of CLO debt securities were to drop by only 10%, banks holding CLO debt securities would face potential cumulative losses of up to $7 billion, which losses would be driven solely by imposition of the Final Rule,” said Ganz.