CLO managers have another year and a half to get into compliance with rules requiring them to have “skin in the game” of deals, but they can’t get started soon enough to please some investors.
Risk retention rules require managers to hold 5% of the notional value of any deals completed after December 2016 on their balance sheets. That’s a tall order for firms that primarily manage money for others and have little of their own money to put to work.
Some investors at IMN's 4th Annual Conference on CLOs & Leveraged Loans Tuesday expressed concern that managers have a workable strategy for getting into compliance.
"We don't want to see managers contorting or embarking on unnatural acts for risk retention," said Dan Spinner, a portfolio manager with Eagle Point Credit Management. Ideally, he said, CLO managers should already have a plan in place.
Others expressed concerns that managers unable to comply may lose some of their edge, inhibiting their ability to manage existing deals, let alone issue new ones.
"If a manager is not likely to have a risk retention plan, two years from now they are likely not to be issuing," said Amir Vardi, director, structured products portfolio manager at Credit Suisse. "We want to make sure that this manager will continue to be involved and that they have the resources to pay attention to these portfolios we are investing in."
Some market players may have already factored the new guidelines into their business models.
"We will see more and more transactions with risk retention and sooner than we think," Spinner noted. "Expect to see more in immediate term."