Impending rules requiring CLO managers to retain a portion of the credit risk in their deals is widely cited as a reason for the drop in new issuance this year. Investors are said to be reluctant to put money to work with a manager without assurances that the has a strategy in place to comply with the rules.
Yet data on the number of managers ready to comply with so-called risk retention rules is scarce.
On Tuesday, the Loan Syndications and Trading Association, provided a rough count: approximately 69% of collateralized loan obligations completed so far this year are “compliant-ish,” according to Meredith Coffey, the trade group’s research director.
Coffey, who was delivering a keynote address at IMN’s annual CLO conference, described the figure as a “back of the envelope” calculation. The rules don’t take effect until December, and regulators haven’t exactly blessed on particular strategy for complying.
“We see managers doing deals and we talk to the managers about their experience,” she said.
Compliance is considered to be onerous for managers, which typically have very small balance sheets. They fund deals by issuing debt and use proceeds to acquire leveraged loans in the secondary market.
Coffey said there has been a “shakeout” in the ranks of CLO managers: in 2014 100 firms completed deals; 30 dropped out in 2015
The new rules definitely favor bigger managers over smaller ones. According to the LSTA, the average manager coming to market with a deal in 2015 had $7 billion in assets under management; by comparison, the average was $1 billion in 2014.
“We called a lot these guys” that dropped out in 2015, Coffey said. “A lot said they didn’t come to market because they didn’t have a risk retention [compliance] plan.”
She noted that several of these smaller players are either seeking to sell themselves to a larger player or have already found buyers.