The Loan Syndications and Trading Association thinks that there is just as strong an argument for exempting collateralized loan obligations from the Volcker Rule as there is for collateralized debt obligations backed by trust preferred securities, and it wants regulators to rule on the two investment vehicles at the same time.
On Dec. 31, the LSTA, along with the Securities Industry and Financial Markets Association, the Structured Finance Industry Group and the Financial Services Roundtable, submitted a letter to joint federal regulatory agencies asking them to confirm, by Jan. 15, 2014, that CLO debt securities that have the right to replace a manager for cause should not be considered “ownership interests” under the Volcker Rule.
The Volcker Rule prohibits banks from holding securitizations of anything other than loans; Trups possess characteristics of both debt and equity, but are clearly securities; CLOs are affected because they typically are backed by corporate bonds in addition to loans. Since the Volcker Rule was finalized Dec. 10, at least three banks have said they planned to sell CDOs or CLOs.
The clarification that the CLO industry is seeking could benefit Trups CDOs as well: it wants to know what constitutes an ownership interest under the Volcker Rule. Banks most typically invest in the senior debt issued by both Trups CDOs and CLOs, and it is typically the equity, or most subordinated class of securities issued by these deals, that are considered to represent ownership interests. However, many CDOs and CLOs provide rights to a “controlling class” of senior debt security holders, allowing them to participate in the selection of the investment manager or investment adviser. This creates the potential for holders of these securities to be considered to hold “ownership interests.”
“The issues facing holders of CDO Trups are nearly identical to those faced by holders of CLO notes,” Bram Smith, executive director of the LSTA, said in a press release issued today. “Neither asset class should be considered as having ownership interest.”
The loan industry trade groups initially submitted a letter to federal regulators on Dec. 24, but three days later, on Dec. 27, the agencies issued a joint statement agreeing to issue a ruling by Jan. 15 on whether Trups CDOs should be subject to the Volcker Rule limitations.
The joint statement was issued in response to a lawsuit filed by the American Bankers Association alleging that the treatment of CDOS of TruPs under the final rules implementing the Volcker Rule as ownership interests was inconsistent with the statute and was done without an appropriate cost-benefit analysis.
Similarly, loan industry trade groups argue that the rapid sale of CLO holdings by banks could disrupt both the CLO and loan markets. The LSTA said that banks are estimated to own $60 billion to $70 billion of CLO notes, most often in the triple-A rated tranches.
The LSTA asked the agencies to consider its request at the same time, and in the same administrative proceeding, as they consider CDOs of Trups.