LSTA seeks clarification on replacing managers for CLO debt securities

By Susanna Moon

Chicago, Dec. 24 - The Loan Syndications and Trading Association in a letter Tuesday to joint federal regulators requested confirmation that CLO debt securities that have a contingent right to remove a manager for cause or to vote for a replacement do not constitute an ownership interest under the so-called Volcker Rule.

The LSTA believes that CLO debt securities that include the right to replace a CLO manager for cause or upon its resignation do not constitute ownership interests under the Volcker Rule, but the association noted the confusion on the matter.

If those rights were deemed to create an ownership interest, banks would be prohibited from acquiring or continuing to hold notes in any CLO that is a covered fund, the LSTA said.

The LSTA is joined in the letter by the Securities Industry and Financial Markets Association, the Financial Services Roundtable, the Structured Finance Industry Group and the American Bankers Association, according to an association press release.

"The lack of clarity on this issue could unnecessarily disrupt the CLO market as banks may decide they can no longer acquire or retain debt securities of CLOs that are covered funds," Bram Smith, executive director of the LSTA, said in the press release.

"If banks are forced to divest their holdings, banks and other investors could be facing material losses as well as a significant reduction of liquidity in the CLO market, which could ultimately threaten the availability and increase the cost of corporate credit," Smith said.

Added Elliot Ganz, general counsel and executive vice president of the LSTA: "CLO noteholders have very limited rights to replace managers in cases involving a significant breach of the managers' obligations."

"These types of events pose clear and direct threats to the interests of noteholders and their ability to respond to them is properly viewed as an essential creditor's right and not an ownership interest."

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