A new rule in Europe—Article 122a of the Capital Requirements Directive, which calls for originators, sponsors or original lenders in an arbitrage CLO to retain at least 5% of the vehicle’s equity on their balance sheet—has European loan market participants worried about the future of these funds, and places a kink in a market that, after two years of inactivity, is just starting up again.

The rule, which was introduced at the beginning of the year, will make creating CLOs — the primary buyers of institutional loans in Europe prior to the financial crisis — more expensive and risky than in the past, when originators could pass along any and all of the risk to secondary investors.

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