The deadline to file for an appeal on vacating risk retention for Collateralized Loan Obligations (CLOs) which ruled on February 9th this year, has passed and some managers have taken on the risk of issuing deals that do not comply with risk retention. May 10 is the last date the agencies can ask the United States Supreme Court to review the D.C. Circuit’s decision. However, the Loan Syndications and Trading Association thinks that timing is highly unlikely given the lack of action since February. Just in case, these deals have clauses in the indenture that allow the manager to comply with risk retention.
The ruling removes the associated costs of taking an investment in a refinanced deal. And, managers will not have to weigh the benefit of lower debt cost against allocating risk retention capital to existing deals or new issues. What this also means is that new CLO managers can enter the market. As we can see from this article, with continued healthy demand for CLOs and possibly more entrants in the marketplace, we would expect increased liquidity and value for CLO securities. However, that may be offset with spread movement. In a coming article, we will look at some of the possible effects of non-compliance with risk retention for CLOs.
A pickup in both new issues and resets in the U.S. following the rollback of risk retention has started to take its toll, as spreads have been widening in response across the capital stack. In Europe, the AAA widening trend came to a halt last week, after two transactions priced below the recent wide of 79 bps. Volume statistics for the year to date are as follows: U.S. — $35.9 billion from 63 deals, versus $19.8 billion from 37 deals in the same period last year. U.S. With the risk-retention rules now officially in the rearview mirror, CLO investors are finding a wide assortment of deals being marketed to them. Those include some of the largest, most active managers as well as the less frequently seen and more opportunistic issuers.