CLO managers are increasingly looking to non-traditional loan facilities to finance the economic interest in the credit risk that they must hold in their deals under the impending U.S. risk retention rules. Over the past year, insurance companies and other non-banking entities with extensive experience investing in collateralized loan obligations have shown considerable interest in providing these facilities. This is hardly surprising, given their numerous structural advantages.
The U.S. risk retention rules require CLO managers to retain an interest in the credit risk of each of their managed CLOs, either directly or through a majority-owned affiliate (commonly known as an “MOA”). The earliest U.S. compliant structural solutions for financing the purchase of the required retention interest proposed a capitalized manager vehicle or “CMV”, the MOA vehicle, and the “hybrid” CMV vehicle (which seeks to synthesize the most desirable components of the CMV and MOA vehicles). All three options require an equity stake to be taken by the CLO manager and/or its affiliates, and a substantial portion of the funding for such financings is derived from third-party sources.