LSTA director: CLOs unfairly harmed by final retention rule terms

By Jennifer Chiou

New York, Oct. 21 – Bram Smith, executive director of the Loan Syndications and Trading Association, said in a statement that the final risk retention rule announced by federal regulatory agencies “needlessly puts in place cumbersome requirements that will materially reduce the CLO market and puts in jeopardy a critical source of credit for job-creating American companies.”

Smith stated that the final terms of the rule are a “one-size-fits-all approach that unfairly harms CLOs” and will negatively impact American credit markets and make financing for U.S. companies more expensive and scarce.

The LSTA expressed its disappointment in pointing out that CLOs are a “historically safe financial product that in no way contributed to the financial crisis this rule aims to safeguard against in the future.”

The statement said that the risk retention rule does not cover the vast majority of residential mortgages – one of the major sources of the financial crisis. During that period, “CLOs performed exceedingly well,” Smith said.

CLOs currently provide nearly $350 billion of loans to corporations, he added. “Unfortunately, very few CLO managers, who function as asset managers on a fee for service model, have the capital necessary to hold securities equal to 5% of the fair value of the CLO as required under the final rule,” he said.

The LSTA said it will explore all options.

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