Proposed European Risk Retention Rule Could Shut Out US CLO Managers

The recent EU Parliament’s Committee on Economic and Monetary Affairs proposal to increase the EU risk retention requirement may block US CLO managers from selling funds, according to a recent Reuters’ article.

Issuance of US CLOs is $25.7 billion this year, down 55 percent from the $56.9 billion the same time last year, due in part to the upcoming US risk retention rule that will require managers to hold 5 percent of their fund. According to Reuters, limiting access to European investors may push volume lower, and fewer CLOs will decrease the appetite for the $880 billion US leveraged loan market.

Under the new proposal, US CLOs would not be considered EU risk-retention compliant and US entities would be prohibited from investing in European CLOs, according to James Warbey, Partner at Milbank, Tweed, Hadley & McCloy. “A new proposal would require that only European-regulated institutional investors can invest in EU securitizations, and only European-regulated entities can be considered an originator or sponsor, which may have large implications for the U.S. market.”

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