CLO primary fades after flurry of issuance; Japan’s proposed risk retention rules eyed

By Rebecca Melvin

New York, Jan. 24 – No new issues were heard to have priced in the collateralized loan obligation market on Thursday, but the market has perked up in recent sessions after getting off to a quiet start for 2019.

Credit Suisse Asset Management Ltd. priced this past week what appears to be the first euro market CLO, with a €407.4 million of notes due Jan. 15, 2032 in the Cadogan Square CLO XIII DAC deal. It included €1.5 million of class X floating-rate notes (Aaa/AAA) priced to yield Euribor plus 50 basis points and €246 million of class A floating-rate notes (Aaa/AAA) at Euribor plus 100 bps.

In the U.S. primary market this week, GoldenTree Asset Management LP priced $807.25 million of notes due April 24, 2031 in the new GoldenTree Loan Management US CLO 4 Ltd./GoldenTree Loan Management US CLO 4, LLC deal, which includes $5.75 million of class X floating-rate notes (AAA) at Libor plus 80 bps and $476 million of class A floating-rate notes (AAA) at Libor plus 129 bps; and Ares Management LLC priced $507.05 million of notes due April 15, 2031 in the new Ares LI CLO Ltd./Ares LI CLO LLC transaction.

Market participants remain focused on concerns with Japan’s proposed risk retention requirements, but BofA Merrill Lynch Research said this past week, “We think that in the near term the CLO market has to see through the noise and keep its cool until explicit clarification” of the issue.

“Market participants should differentiate between the decline in Japanese CLO purchase due to pending regulation in need of clarification and due to seasonal variations (pending fiscal year end in Japan),” the team wrote in a note.

The Japanese Financial Services Agency is looking to introduce a risk retention element to regulatory capital requirements for securitizations. Given the prominence of Japanese banks within the investor base of AAA-rated CLO tranches, the literal reading of the JFSA’s draft law raises concerns about the viability of the Japanese buyer base for US CLOs, the BofA Merrill Lynch Research team wrote.

“Without a detailed translation of the Japan FSA regulatory proposal, we rely on our conversations with market participants, information from public briefings and discussions to formulate our view. We did not receive particularly anguished feedback from the Japanese market participants, where the discussions and communications of the previous couple of months have led them to believe that exemption from mandatory risk retention would be granted to US BSL CLOs, in line with the US legal framework and current market practices,” the team wrote.

The BofA Merrill Lynch Research team doesn’t expect such treatment to apply to U.S. middle-market CLOs or E.U. CLOs.

“This is in line with our view that the draft regulation is intended to realign Japanese securitization regulation with BIS3 and prevalent foreign practices without creating unnecessary disruptions on the securitization markets.

“We believe that there is a good chance that the implementation of the JFSA securitization regulation as it applies to US open market CLOs will eventually emphasize that the assets underlying BSL CLOs are appropriately originated, and that the (Japanese) investors receive the necessary information flow and have the proper infrastructure in place to accurately monitor their CLO exposures,” the team wrote.

In the near term, the CLO market has to “see through the noise and keep its cool” until explicit clarification is forthcoming.

Comments to the proposal are due Jan. 28 with a final rule expected to be implemented and effective on March 31.

“Markets participants should differentiate between the decline in Japanese CLO purchase due to pending regulation in need of clarification and due to seasonal variations (pending fiscal year end in Japan). If the regulation were to be introduced as literally interpreted today then CLO issuance would likely be damped in the near term as managers seek to raise risk retention capital,” the BofA Merrill Lynch Research team wrote.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.