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Did CLO industry err in lobbying for an exception to risk retention?

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Relief from rules requiring "skin in the game" of deals would be a godsend for collateralized loan obligations, but Hans Christensen, chief executive of MJX Asset Management, isn't very hopeful that either lawmakers or regulators will come through.

“It would be nice to have a more moderate capital requirement on risk retention, but it’s not one of the highest priorities, unfortunately. Unlike all the other structured-credit businesses, ours is [only] a $500 billion business," he said."I think it’s the tail wagging the dog.”

Christensen was speaking at an opening-day panel session Sunday at the 24th annual ABS East structured-finance conference in Miami, hosted by Information Management Network. The three-day event is being held just over one week after large parts of the city were evacuated in anticipation of Hurricane Irma.

The CLO industry has long argued that the rules, which took effect in December 2016 and require sponsors of securitizations to keep 5% of the economic risk in their deals, are overly burdensome. A number of smaller managers have left the market or been acquired by larger firms. Even for MJX, which has over $12 billion in assets under management, half of it subject to the rules, “5% of $6 billion is a hell of a lot of money,” Christensen said.

The CLO manager likened the industry's lobbying to “trying to tell Hurricane Irma to stop with my shotgun,“ and suggested that it might have been misguided to argue that CLOs deserve a carve-out. He believes there will be changes in the CLO market only if there are changes in the other [ABS] sectors.

One of his fellow panelists disagreed. Kristi Leo, a part-time senior policy adviser for the Structured Finance Industry Group, said that, to the contrary, CLOs seem to occupy many of the conversations she has on Capitol Hill. “I talk to lots of Congressmen and senators ... and they truly belief risk retention has broken this asset class,” said Leo, who is also founder of Boulder Advisors.

What is proving difficult is the fact that CLO investors don't share this view. Some investors “don’t see CLOs as broken,” and look for risk retention to represent its intended goal of aligning interests of the manager and investor," Leo said. But others see benefits to increased yield potential on CLOs with not having managers forced to keep risk-retention holdings in place. “There are some issuers that are fine with getting rid of it,” she said.

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