Concerns about risk retention rules could lead CLO managers to structure new deals with shorter non-call periods, according to analysts at Barclays.
The most recent version of proposed rules requiring sponsors to have “skin in the game” provide for an exemption for collateralized loan obligations. This exemption applies to CLOs that include only “CLO-eligible” loans. But for a loan to be deemed “CLO-eligible,” the lead arranger must retain an unhedged, 5% stake in the deal until maturity.
As a number of banks and a number of law firms have noted, this new provision does not provide any relief, since the requirements is too onerous on banks to make it worthwhile. “Unless the rules are relaxed further before they take their final form, we expect the CLO market to begin to contract once risk retention takes effect, or two years after the rules are final,” Barclays analysts said in research published Friday.
While risk retention is a longer-term negative for CLO issuance, however, Barclays thinks it could boost issuance in the near term as deals get pulled forward. The catch: these deals are likely to have shorter periods in which they cannot be called, to allow managers to exit ahead of the proposed rules.
Barclays noted that non-call periods have hovered round two years since 2010, but said they could decline to allow new vehicles to be refinanced before the rule takes effect.