Loan market participants are in an uproar over the announcement by the European Parliament this Monday that it is considering quadruple the amount of skin that originators of asset-backed securities must have in the game.
The proposal would require originators of collateralized loan obligations and other types of asset-backed securitizations to hold at least 20% of the notional value of notes issued by these transactions.
The current rule requires a minimum 5% stake, similar to the level that takes effect in the U.S. in December requiring CLO managers to hold the economic risk of their deals.
The draft EU rule changes would also restrict stakeholders and originators to European-regulated entities, cutting off an existing option used by U.S. CLO managers to issue retention-compliant securities in the European market.
The Loan Syndications and Trading Association, a trade group whose members include Euro CLO investors and issuers/managers, joined a chorus of protests against the proposal Friday. In a weekly newsletter published Friday, the LSTA said the proposal was an “alarming development” for European CLO originators and sponsors.
The LSTA, which is still fighting the 5% threshold in forthcoming U.S. regulations, notes that a 20% level is “an obviously unworkable number.” Such a level would require CLO managers to keep stakes amounting to $100 million of every $500 million of asset-backed notes issued in a portfolio.
Reuters reports Euro CLO managers are worried the new rules would make CLO issuance “unfeasible,” due to the higher level of capital retention that many smaller managers would be unable to meet.
The risk-retention revisions are part of a draft proposal put forth by the parliament’s Committee on Economic and Monetary Affairs, and are being led by Dutch Labor Party representative Paul Tang.
The proposed changes are considered a long-shot, according to the LSTA, with media reports indicating they are political cover for more palatable changes the industry might accept, such as a more-transparent public registry of loan-level data and investor positions in asset-backed securitizations.
U.S. managers issuing CLOs in the smaller European market (only 17 deals totaling €$6.8 billion have been issued year-to-date) have utilized the so-called “originator” model which allows U.S. institutions to offload the retention slice into an affiliated sponsored vehicle. But that definition is seen as a loophole by EU regulators who have been discussing ways of forcing CLO issuers and arrangers to wean themselves from single-purpose vehicles and better align their interests with investors.
The LSTA says the new parliament proposal would “foreclose the originator risk retention option that currently does not require EU registration and is the method most U.S. managers are currently employing,” it noted in the newsletter.
“The only good news it’s that Tang’s proposal is the first step in a long process before these amendments get adopted,” the newsletter continued “There will surely be pushback from securitization market participants.”