Andy Barr, the GOP representative for Kentucky’s sixth district and a member of the House Financial Services committee, is going to bat for CLOs again.
In a keynote speech at an industry conference Tuesday, the lawmaker said that he planned to introduce legislation easing the bite of risk retention rules for collateralized loan obligations.
Barr was the author of the “Barr Bill” in 2013 (with co-sponsor Carolyn Maloney, D-NY) that sought to extend the deadline for compliance with another regulation, the so-called Volcker Rule, which puts certain CLOs off-limits to banks.
Speaking at the IMN conference Tuesday, Barr said that although that bill passed the House Financial Services Committee by a comfortable margin in 2014, it failed in a suspension vote (usually those for uncontroversial bills targeted for clear sailing past a full house vote). He blames the “Warren factor” that is building up partisan opposition to any measure amending the Dodd-Frank act.
Barr has two new bills. One just introduced to the House Financial Services Committee on April 16 (HR 1841) would extend until 2019 the deadline for legacy CLOs, those issued before the financial crisis, to comply with Volcker retention. Presumably, by that date these older CLOs will have come to the natural end of their lives.
The second bill, which Barr plans to introduce in the coming weeks, would create a “qualifying CLO” exemption to risk retention for CLOs that meet certain criteria. He is mirroring the qualified mortgage exception that was created to exempt banks holding stakes in securitizations of residential mortgages that meet certain criteria.
“The idea here is that since the Dodd-Frank Act and the Consumer Financial Protection Bureau have given certain qualified mortgages’ a safe harbor, then regulators can similarly afford high quality CLOs an asset class that performed well, much better than the offending mortgages during the financial crisis a comparable safe harbor,” Barr said.
“We want a comparable safe harbor under the risk retention rules for CLOs,” he added.
The qualified CLO would have to meet criteria under six specific standards involving quality, portfolio diversity, and investor protections. They are
--Assuring the assets are high quality. CLOs must invest 90% of their cash in senior secured loans that are held by three or more investors not affiliated with the CLO manager. No more than 60% of these loans may be covenant-lite.
-- Making sure assets are diverse already a characteristic of most CLOs no more than 3.5% of the portfolio in any one particular loan no more than 15% in loans to any one borrower.
-- Interest coverage, total collateralization tests to provide additional protection for investors beyond the contents of the portfolio itself. Equity must be 80% of the qualified CLOs assets .
--Aligning managers and investors interests with retention requirements. A “coordination of majority of fees in the event of default and the ability for equity investors to remove managers for cause,” Barr said. A qualifiying CLO will be open market and a manager will be required to retain a percentage of the equity tranche.
-- Require monthly reports on assets and portfolio performance. Will conduct collateralization tests and track defaults of underlying assets.
-- Maintain regulatory oversight. CLO manager must be a registered investment advisor.
“So with these six overlapping protections, a qualified CLO will have a sound structure, will invest in higher quality leveraged loans, will ensure an alignment of interests between the CLO manager and the investor, would ensure these sophisticated investors would receive all the information they need,” Barr said.
“We will need bipartisan agreements to get these policy fixes across the finish line.”
Barr does not yet have a Democratic co-sponsor, but is seeking one. “If we can’t do that, we will go ahead and put it out there and let Democrats up when they can,” he said.
“We just need to educate members on both sides of the aisle about why this is a common sense approach, that if we do it for mortgages which were actually caused the financial crisis but we don’t do it for an asset class that had nothing to do with the financial crisis, there’s not going to be a problem.”