IACPM submitted a comment letter to the U.S. Joint Agencies regarding the Credit Risk Retention Re-Proposal (SEC 34-70277). The proposal contains an option whereby CLOs can satisfy risk retention requirements via investing in “CLO eligible tranches” of loan facilities. (The original option, whereby risk retention can be satisfied by CLO managers retaining a portion of their deals, remains available.) The new option would effectively shift responsibility for risk retention to Lead Arrangers of syndicated loans and would require: 1) the loan arranger retain 5% of the designated CLO eligible tranche for the life of the loan; and 2) the 5% may not be sold or hedged.
In the comment letter IACPM indicating that the requirement for a 5% hold in designated “CLO eligible” tranches is contrary to the ability to prudently manage risk in a bank’s credit portfolio given the need to balance ongoing client requests for incremental credit over time against the constraints of individual obligor limits, industry limits and leveraged lending limits. In addition, the requirement would likely limit lead arrangers’ appetite for other leveraged loan facilities such as revolving credits and, as such, could limit working capital flexibility for borrowers who rely on banks to provide revolving credit facilities.